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THE   ELEMENTS 


OF 


PUBLIC    FINANCE 


THE  MONETARY  SYSTEM  OF 
THE  UNITED  STATES 


BY 

WINTHROP   MORE   DANIELS,   M.A. 

Professor  of  Political  Economy  in  Princeton  University 


i^^'^Z. 


NEW   YORK 

HENRY   HOLT   AND  COMPANY 
Nov-  10  IB 


Copyright,  1899, 

BY 

HENRY    HOLT   &    CO. 


HT 


TO 

Cbarles  "M,  ^caipin 

WITH    TRUE    REGARD 


PREFACE. 

The  present  volume  owes  its  origin  to  the  want  the  author 
experienced  in  finding  a  suitable  text  for  his  classes.  Such 
treatises  as  were  at  hand  proved  unsuitable  for  one  or  the 
other  of  two  very  different  reasons.  Either  their  treatment 
of  financial  theory  was  too  detailed,  or  the  scope  they 
allowed  to  public  finance  was  too  narrow  to  include  certain 
subjects — such  as  our  currency  system — which  I  thought  fit 
to  discuss  in  a  somewhat  practical  manual. 

So  manifold  are  the  obligations  I  am  under  to  various 
writers  on  finance  that  I  shall  make  no  attempt  to  enumer- 
ate them  all  in  this  place.  I  have  indicated  in  the  foot- 
notes the  sources  from  which  I  have  drawn  much  of  my 
material,  and  have  added,  here  and  there,  an  appreciative 
comment.  It  would  be  unfair,  however,  not  to  mention  the 
great  assistance  I  have  derived  from  the  writings  of  Bns- 
table,  Seligman,  and  H.  C  Adams.  The  latter's  Science  ef 
Finance  had  not  issued  from  the  press  when  my  manuscript 
went  to  the  printer,  and  consequently  I  have  been  able  to 
insert  only  a  few  cross-references  to  this  excellent  work 
while  correcting  my  proofs.  I  am  under  special  obligations 
to  my  friend,  Professor  Stockton  Axson,  for  his  kindly  and 
valuable  assistance  in  reading  the  proof. 

W.  M.  D. 

Princeton,  May  15,  1899. 

V 


TABLE  OF  CONTENTS. 

PAGE 

TxTRODUCTiON.  — Public  Finance,  its  Nature I 

History  of  Financial  Systems 7 

PART    I. 

GOVERNMENT  OUTLAY. 

CHAPTER 

I.  Theories  of  Public  Expenditure 25 

II.  Expenditure  IN  THE  United  States 34 

PART    II. 

GOVERNMENT  INCOME. 

I.  Taxation,  its  Essential  Nature 53 

II.  Taxation,  its  Real  and  Apparent  Burden 63 

III.  Taxation,  its  Equitable  Distribution 79 

IV.  Taxation,  its  Practical  Efficiency 92 

V.  State  Taxation  (Mainly  Direct) iii 

VI.  Federal  Taxation  (Internal  Revenue) 130 

VII.  Federal  Taxation  (Customs  Duties) 153 

VIII.  The  Income  Tax 181 

IX.   Public  Income  from  Quasi-Economic  Sources 207 

X.  Extension  of  the  State's  Contractual  Income 224 

XI.  Municipal  Monopolies 265 

PART    III. 

TREASURY  MANAGEMENT. 

I.  Government  Borrowing,  OR  Public  Credit 285 

II.  Relation  of  the  Federal  Treasury  to  Our  Mone- 
tary System 315 

„   III.  Budgetary  Legislation 344 

Appendix 375 

Index 379 

vii 


INTRODUCTION. 


I. 


The  Definition  of  Public  Finance. — No  little  ingenuiry 
has  been  expended  by  philosophical  jurists  to  imprison 
"  within  the  ring  fence  of  a  restrictive  definition  "  tl;e 
essence  of  government.  Not  infrequently  these  defini- 
tions appear  to  the  ordinary  inquirer  as  '  hypostatized 
abstractions,' — adequate  perhaps  to  purposes  of  political 
theory,  but  foreign  to  the  every-day  experience  of  the 
market-place.  It  is  not  surprising,  therefore,  that  at- 
tempts have  been  made  to  define  government  in  terms 
which,  if  lacking  in  philosophic  comprehensiveness,  are 
at  least  capable  of  being  tried  by  the  facts  of  actual  civic 
life.  "  Whatever  else  it  may  be,"  says  Mr.  John  Fiske,i 
"  the  government  is  the  power  which  taxes.  ...  If  we 
are  in  any  doubt  as  to  what  is  really  the  government  of 
some  particular  country,  we  cannot  do  better  than  to 
observe  what  person  or  persons  in  that  country  are 
clothed  with  authority  to  tax  the  people."  Ruskin  ^ 
sounds  much  the  same  note  where  he  dubs  the  '  thing ' 
called  a  '  government '  "  an  apparatus  for  collecting  and 

*  Civil  Government  in  the  United  States,  p.  7» 
*Fors  Clavigera,  III.,  p.  237. 


2  INTRODUCTION. 

spending  money."  These  rough-and-ready  descriptions 
of  government  may  not  exhaust  its  significance,  but  they 
■do  emphasize  the  most  conmion,  perhaps  the  most  char- 
acteristic, feature  of  this  poHtical  entity.  The  collection 
and  expenditure  of  money  is,  of  course,  not  so  nmch  the 
end  of  government,  as  the  means  whereby  it  accom- 
plishes its  ultimate  purposes.  The  study  of  this  essential 
prerequisite  to  all  governmental  activity  is  the  domain 
of  Public  Finance. 

Public  Finance,^  therefore,  we  may  define  as  the 
study  of  the  collection  and  expenditure  of  funds  legally 
devoted  to  public  ends.  It  will  naturally  embrace  the 
most  prominent  effects,  political  and  economic,  which 
result  from  the  exercise  of  this  all-important  govern- 
mental function.  This  definition  recognizes  the  coercive 
character  of  revenue  collection  and  expenditure.  This 
does  not  imply  that  personal  unwillingness  on  the 
part  of  the  subject  always  attends  upon  financial  ad- 
minstration,  but  indicates  that  the  field  of  public  finance 
lies    wholly    within    the    domain    of    positive    law,    and 


^  The  word  finance  comes  from  the  Latin  iints.  through  two 
mediaeval  derivatives,  finatio  and  financia.  These  latter  by  meton- 
ymy (where  the  period  of  indebtedness  was  used  for  the  debt 
itself)  meant  the  payment  of  indebtedness,  and  are  analogous 
to  the  early  use  of  our  English  word  fine.  In  the  sixteenth 
century  finance  was  used  synonymously  with  money  in  France, 
while  in  Germany  the  word  finance  fell  into  bad  philological 
company  and  became  equivalent  to  extortion.  Sec  Schunbcrg, 
Handbuch  der  Pol.  Oek.,  III.,  p.  7.  Finance  is  used  to-day  in 
English  with  no  little  latitude  in  meaning  It  is  sometimes 
used  either  alone  or  in  connection  with  some  other  term  to 
cover  the  monetary,  commercial,  or  industrial  sphere.  Mr. 
Gififen  entitles  his  shorter  miscellaneous  writings  Essays  in 
Finance.  When  finance  is  qualified  by  the  term  public  there 
can  be  little  question  as  to  its  exact  connotation.  It  is  worthy 
of  note  that  finance  is  used  both  in  the  singular  and  in  the 
plural.  Used  in  the  singular  it  not  infrequently  denotes  the 
art  of  financial  management,  whereas  the  plural  generally  ap- 
plies to  th?  state  of  ^  nation's  resource;?, 


PkACTICAL  BEARINGS  OF  PUBLIC  FINANCE.  3 

excludes  purely  voluntary  contributions  or  payments, 
such  as  public  subscriptions,  for  example,  or  contracts 
between  private  individuals  or  corporations. 

Practical  Bearings  of  Public  Finance. — The  objection 
has  been  urged  to  formal  and  systematic  treatises  on 
finance  that  finance  is  essentially  an  art,  that  it  is  not 
subject  to  rule  and  precept,  that  success  in  this  sphere 
cannot  be  taught,  and  that  the  financier,  like  the  poet, 
is  born,  not  made.  There  is  in  this  a  trace  of  truth. 
There  were  eminent  financiers  before  finance  was  ever 
regarded  as  a  science.  Moreover,  the  mere  study  of  the 
general  principles  of  the  science  can  no  more  make  a 
great  financier  than  the  mere  study  of  politics  can  create 
a  Bismarck.  At  the  same  time  there  is  a  well  estab- 
lished body  of  facts,  economic  and  financial,  which  go 
far  to  equip  the  statesman  for  dealing  with  questions  of 
a  financial  nature.  Not  only  have  many  of  the  most 
famous  financiers  been  careful  students  of  the  general 
theory  of  finance,  but  they  have  frequently  enriched 
the  theory  itself.  Turgot  and  Peel  are  instances  in 
point.  Our  chief  need  to-day,  however,  is  not  to  equip 
financial  experts,  but  to  instruct  public  opinion.  It  is 
necessary  to  dissipate  the  idea  that  finance  is  a  matter  of 
occult  fortune  or  clever  juggling.  It  is  essential  that  a 
self-governing  people  should  vmderstand  that  there  are 
certain  well  ascertained  and  comparatively  simply  prin- 
ciples to  which  financial  legislation  and  practice  must 
conform,  unless  disaster  is  deliberately  invited.  "  Fi- 
nance," as  M.  Leroy-Beaulieu  says,  "  has  a  terrible 
fashion  of  avenging  itself  upon  governments  by  whom 
it  is  ignored  or  defied."  ^ 

Even  when  it  is  admitted  that  there  is  a  sufficient  basis 
of  fact  upon  which  financial  generalizations  may  be  built, 

*  Science  des  Finances,  I.,  preface  to  the  fifth  edition,  p.  viii. 


4  INTRODUCTION. 

there  prevails  not  infrequently  the  impression  that  at 
best  the  subject  is  largely  devoid  of  interest.  The  field 
has  no  attraction  for  the  general  public.  An  old  adage 
has  associated  death  and  taxes  in  their  quality  of  certain 
recurrence,  and  most  people  try  to  think  as  little  of  the 
one  as  of  the  other.  Taxes  are  commonly  thought  to  be 
the  most  dismal  part  of  '  the  dismal  science,'  and  the 
trail  of  statistics  is  over  them  all. 

And  yet  finance  is  not  lacking  in  practical  or  theoretical 
interest.  It  is  preeminently  one  of  the  things  that  "  come 
home  to  men's  business  and  bosoms."  Consider  first  the 
bearing  of  finance  upon  the  income  of  the  individual  citi- 
zen. Mr.  Robert  Luce  in  an  essay  ^  upon  this  subject 
says  :  "  It  can  be  proved  that  the  average  American 
citizen  works  one  month  out  of  the  year  for  the  sake  of 
being  governed.  In  other  words,  taxation  takes  one 
twelfth  of  his  earnings.  This  average  American  is  the 
head  of  a  family  of  five  persons,  earning  a  thousand 
dollars  a  year.  He  pays  thirty  of  this  into  the  national 
treasury,  thirty  into  the  state,  county,  city,  or  town 
treasury,  and  at  a  moderate  estimate  twenty-three  dollars 
more  for  the  indirect  cost  of  collection.  The  total,  equal 
to  one  month's  earnings,  does  not  afTect  the  question  of 
the  equitable  distribution  of  the  burden,  but  emphatically 
shows  the  importance  of  the  question."  We  are  not  here 
concerned  with  the  exactness  of  this  estimate  nor  with 
the  data  on  which  it  is  based.  But  granting  it  to  be  ap- 
proximately true,  it  emphasizes  the  significance  of  an 
understanding  of  public  finance  for  the  taxpayer. 

M.  Leroy-Beaulieu  has  undertaken  an  estimate  of  the 
part  of  the  income  of  the  nation  which  is  absorbed  by 
taxation  in  certain  countries  of  Europe.  He  finds  that 
in  Belgium  taxes  take  from  six  to  six  and  a  half  per  cent. 

^Public  Opinion,  1892,  p.  51. 


THEORETICAL  BE/f RINGS  OF  PUBLIC  FINANCE.  5 

of  the  public  income ;  in  England,  seven  and  three 
quarters  per  cent. ;  in  France,  eleven  per  cent. ;  and  in 
Italy,  fifteen  or  sixteen  per  cent.^  Let  the  importance  of 
financial  legislation  and  administration  be  thus  brought 
home  more  directly  to  the  taxpayer,  and  the  subject  will 
be  invested  with  far  greater  importance  than  it  now 
obtains. 

Theoretical  Bearings  of  Public  Finance. — Not  alone 
for  the  man  of  affairs  does  the  study  of  finance  have  a 
controlling  interest.  The  historian  and  the  sociologist 
can  ill  afiford  to  dispense  with  its  study.  This  is  very 
commonly  recognized  in  the  domain  of  historical  investi- 
gation. A  fairly  definite  insight  into  the  life  of  any 
period  must  include  some  knowledge  of  the  social  dis- 
tinctions in  which  the  financial  system  was  rooted,  and 
which  in  turn  it  helped  to  perpetuate. 

The  student  of  constitutional  liberty  does  not  need  to 
be  told  of  the  dominant  role  played  by  financial  issues  in 
modern  politics.  These  issues  have  been  not  only  the 
unfailing  source  of  party  strife ;  they  have  been  as  well 
the  formative  influences  in  constitutional  growth. 

But  aside  from  the  purely  historical  import  of  the  sub- 
ject, finance  has  for  the  acute  observer  of  shifting  social 
currents  an  interest  not  inferior  to  that  excited  by  any 
other  social  movement.  The  lines  of  social  cleavage 
run  to-day  substantially  parallel  with  lines  of  wealth. 
Those,  moreover,  who  regard  the  present  economic  con- 
stitution of  society  as  evil  are  only  too  apt  to  look  upon 
the  tax  power  as  the  readiest  implement  of  reform.  The 
inequalities  of  the  law  of  competition  they  would  correct 
by  the  equity  of  expropriation.  This  employment  of  the 
tax  power  may  possibly  be  justified  up  to  a  certain  limit. 
The  governmental  assumption  of  certain  natural  monop- 

*  Science  des  Finances,  I.,  p.  133. 


6  'INTRODUCTION. 

oHes  may  be  warranted  upon  grounds  of  public  utility. ^ 
But  thoroughgoing  Socialism  or  Collectivism  would 
probably  deny  that  any  limit  upon  the  tax  power  is  justi- 
fiable which  stops  short  of  the  proximate  realization  of 
their  distributive  ideal.  It  is  right  here  that  the  sociolog- 
ical side  of  finance  becomes  of  prime  importance.  The 
present  constitution  of  private  property  has  been  chal- 
lenged. Whether  this  institution  can  or  ought  to  be 
changed  ;  if  so,  to  what  degree  ;  whether  the  distribution 
of  the  social  dividend  can  be  effected  upon  another  basis 
than  the  present  one ; — these  are  the  points  of  contact 
between  Collectivism  and  the  industrial  constitution  of 
modern  society.  In  short,  the  battle-field  where  Social- 
ism will  not  improbably  assail  the  conservative  forces  of 
society  lies  within  the  domain  of  finance.  Thus  its  study 
acquires  a  larger  scope  and  affords  a  more  extended  out- 
look. It  remains  no  longer  the  mere  technique  of  tax 
collection  and  expenditure,  but  joins  the  theoretical 
moral  and  political  sciences,  and  extends  its  speculations 
beyond  the  world  of  the  Present  into  the  society  of  the 
Future. 

Relation  to  Cognate  Disciplines. — There  are  two  roads 
by  which  the  study  of  finance  may  be  approached — 
through  the  province  of  Political  Economy  or  through 
that  of  Law.2  The  first  is  the  English  method  ;  the  latter 
is  the  method  of  the  typical  German  publicist.  If  the 
former  be  adopted,  finance  will  be  classed  as  a  branch  of 
applied  Economics.  If  the  latter  alternative  be  chosen, 
finance  will  be  viewed  as  a  department  of  Administration. 
This  divergence  in  classification  illustrates  the  different 


*  Cf.  Sidgwick,  Principles  of  Political  Economy,  p.  408;  also 
Hadley,  Economics,  p.  397  sq. 

'  Cf.  Bastable,  Public  Finance,  p.  7.  (Note. — All  references  to 
Bastable's  Public  Finance  are  to  the  second  edition.) 


THE  MODERN  FINANCIAL   CONSTITUTION.  7 

historical  origin  and  development  of  the  science  in  the 
two  countries.  Self-government  in  England  involved 
the  necessity  of  a  popularly  evolved  and  approved  system 
of  taxation.  Hence  the  necessity  of  an  economic  justi- 
fication of  legislation  which  affected  the  taxpayer's 
purse.  In  Germany,  on  the  contrary,  the  power  of  the 
Crown  has  imposed  from  above  a  financial  regime  upon 
the  subject;  and  in  consequence  the  perfecting  of  admin- 
istrative machinery  was  the  task  of  the  beaurocracy. 
Adam  Smith  typifies  the  English  view,  as  Stein  repre- 
sents the  German  conception  of  the  subject.  Whichever 
classification  be  adopted  for  the  sake  of  convenience  in 
the  logical  distribution  of  the  content  of  knowledge, 
there  can  be  no  essential  difiference  of  opinion  as  to  the 
relation  of  cognate  sciences  to  the  science  of  Finance. 
To  adapt  the  abstract  formulae  of  theory  to  given  con- 
ditions the  fullest  historical  knowledge  of  the  concrete 
conditions  is  necessary.  Statistical  data  when  accessible 
are  as  indispensable  here  as  elsewhere  in  the  domain  of 
practical  politics.  Economics  must  largely  furnish  the 
premises  wherever  the  effect  of  financial  action  upon 
material  welfare  is  involved ;  and  Ethics  must  not  infre- 
quently constitute  the  court  of  final  appeal  where  issues 
of  justice  and  social  duty  arise. 


II. 

THE   HISTORICAL   DEVELOPMENT   OF   FINANCE. 

The  Modem  Financial  Constitution.  —  An  economic 
system  varying  endlessly  in  non-essentials,  but  identical 
in  its  general  outlines,  is  to  be  found  in  every  advanced 
industrial    nation    of    to-day.      This    system    has    been 


8  INTRODUCTION. 

variously  named  and  described.  Perhaps  the  term  Fac- 
tory System,  while  not  entirely  unobjectionable,  is  as 
adequate  a  title  as  has  been  suggested.  It  covers,  how- 
ever, but  one  side  of  modern  economic  life.  We  may 
use  the  term,  nevertheless,  to  connote  the  vmiversal 
features  of  the  industrial  constitution  of  the  present. 
These  invariably  recurring  characteristics  may  be 
summed  up  in  Prof.  Marshall's  phrase  '  Freedom  of  In- 
dustry and  Enterprise.'  ^  This  is,  however,  only  the  sub- 
jective side  of  the  matter,  and  serves  chiefly  to  con- 
trast it  with  the  restrictive  features  of  an  earlier  economic 
era. 

The  objective  side  of  this  system  cannot  be  portrayed 
in  a  single  phrase,  but  it  may  be  provisionally  described 
as  embracing  the  modern  productive  process,  with  its 
vast  and  complex  aggregate  of  capital,  directed  by 
the  captains  of  industry,  each  commanding  his  bat- 
talion of  the  industrial  army.  It  is  prosecuted  under  a 
regime  of  minutely  specialized  employment,  and  it  in- 
volves to  an  incredible  extent  the  delicate  yet  effective 
application  of  credit.  All  this  necessitates  numberless 
social  adaptations,  of  which  the  concentration  of  popula- 
tion into  cities  and  the  perfecting  of  transportation 
facilities  are  perhaps  the  most  prominent.  Such,  in 
briefest  detail,  is  the  industrial  system  with  which  we  are 
to-day  familiar.  Whatever  be  its  permanence  or  merit 
is  not  here  the  question.  Friend  and  foe  are  at  one,  how- 
ever, in  the  description  given  of  its  general  features.  But 
the  point  to  be  insisted  upon  is  this,  that  analogous  to 
this  economic  system  we  find  in  all  these  nations,  with 
countless  varieties  in  detail,  it  is  true,  a  substantially 
identical  system  of  public  finance  which  we  may  term 
the  modern  financial  constitution.     The  general  outline 

^  Principles  of  Economics,  Third  Edition,  Vol.  I.,  p.  8. 


THE  MODERN  FINANCIAL  CONSTITUTION.  9 

of  this  system  of  finance  must  first  be  set  forth,  and  its 
historical  development  must  then  be  reviewed. 

The  first  characteristic  feature  to  be  noted  is  the  normal 
and  calculable  Held  of  governmental  activity.  When  war  is 
the  normal  state  of  affairs,  or  w^here  war  is  so  frequent 
as  to  preclude  the  assumption  of  undisturbed  industry 
for  any  considerable  .length  of  time,  prevision  as  to  gov- 
ernmental expenditure  is  largely  impossible.  It  is  only 
when  the  transition  has  been  made  from  '  militarism  '  to 
'  industrialism,'  to  use  Mr.  Spencer's  terms,  that  reason- 
ably accurate  prevision  can  be  made  as  to  the  probable 
expenditure  of  the  government.  It  needs  no  extensive 
acquaintance  with  history  to  see  that  the  present  is  in 
general  an  era  of  peace  as  compared  with  previous  cen- 
turies. Universal  disarmament,  it  is  true,  seems  very 
largely  a  Utopian  ideal,  perhaps  an  '  iridescent  dream.' 
Universal  international  arbitration  also  may  have  long 
to  wait  for  its  perfect  realization,  but  fortunately  our 
century  has  not  been  in  the  main  one  of  *  wars  and 
rumors  of  war.'  We  normally  assume  that  the  coming 
year  will  be  one  of  peace,  or  at  worst  a  continuation  of  an 
armed  neutrality ;  and  on  the  basis  of  this  assumption  we 
predict  the  immediate  future  of  the  state's  financial  activ- 
ity. Statistics,  it  is  true,  afford  us  the  immediate  data 
for  our  calculation,  but  these  very  statistics  depend 
largely  for  their  validity  upon  the  continuance  of  those 
peaceful  conditions  which  prevailed  while  they  were 
collected.  Politics,  it  is  safe  to  predict,  will  never 
become  an  exact  science  in  the  degree  that  certain  of 
the  physical  sciences  are  said  to  be  exact.  But  when, 
as  has  sometimes  happened,  a  finance  minister  can  pre- 
dict for  the  coming  year  both  expenditures  and  receipts 
within  a  fraction  of  one  per  cent.,  in  a  total  of  hun- 
dreds of  millions,  the  degree  of  quantitative  precision 


to  INTkODUCTlOrf. 

required  to  constitute  an  exact  science  does  not  seem  to 
be  altogether  unattainable. 

The  second  distinctive  feature  of  the  modern  financial 
constitution  is  the  periodic  exaction  of  money  from  citizens 
for  the  support  of  the  state.  This  conception  seems  to  us 
moderns  natural  and  indeed  inevitable.  The  fact  is  that 
this  annually  enforced  exaction  of  money  from  citizens 
is  historically  of  comparatively  recent  origin.  In  times 
of  classical  antiquity  the  natural  assumption  w^as  that  the 
citizen  ought  not  to  be  expected  to  pay  taxes.  The  citi- 
zen was  the  beneficiary  of  the  state,  not  its  financial  sup- 
port. Revenue  came  from  those  who  were  not  citizens, 
from  subject  allies  or  conquered  dependencies.  "  Of 
whom,"  said  our  Lord,  "  do  the  kings  of  the  earth  take 
tribute  ?  of  their  children  or  of  strangers  ?  "  ^  And 
the  answer  "  Of  strangers  "  came  as  naturally  as  though 
this  were  a  first  axiom  of  political  philosophy.  Such 
indeed  it  then  was.  Originally,  then,  the  citizen  was  not 
'  taxed  '  at  all, — at  least  in  the  modern  sense  of  the  term. 
Even  when  taxes  as  we  know  them  had  been  definitely 
instituted,  their  very  names  not  infrequently  show  that 
they  were  in  a  sense  voluntary  offerings  or  contributions 
rather  than  legal  exactions.  Thus  in  early  English  his- 
tory taxes  were  called  '  grants,'  '  aids,'  '  benevolences,' 
*  subsidies.'  ^  Moreover,  when  taxes  were  exacted  from 
the  citizen  as  a  matter  of  legal  right,  such  exactions  origi- 
nally were  not  regularly  recurrent,  but  occasional.  They 
were  imposed  not  annually,  but  upon  the  occasion  of 
pressing  need.  They  were  regarded  as  tiding  the  gov- 
ernment over  some  special  exigency  or  danger,  and  were 
at  first  sometimes  repaid.  In  all  these  particulars  taxa- 
tion, as  we  know  it,  is  distinctly  a  new  historical  product. 

'  Matt.  17  :  25. 

^  Cf.  Ely,  Taxation  in  American  States  and  Cities,  p.  27>  iot 
an  American  parallel. 


THE  MODERN  FINANCIAL   CONSTITUTION.  n 

Th\rd\y,  popular  control  over  puhlicincome  and  expenditure 
is  another  mark  of  the  modern  financial  system.  Modern 
finance  is  as  new  as  modern  representative  government. 
ConstitutionaHsm  itself  is,  as  Prof.  H.  C.  Adams^  re- 
marks, essentially  the  control  over  the  public  purse  by 
the  property-owning  classes.  This  implies,  of  course, 
that  these  classes  exert  through  their  representatives,  or 
in  spite  of  them,  a  substantial  control  over  taxation  and 
expenditure.  This  is  in  large  part  the  substance  of 
political  liberty  as  known  to  English  history.  To  be  sure 
it  frequently  masks  under  the  guise  of  Equality  or 
other  political  cloaks.  It  uses  now  this  political  watch- 
word and  now  that,  but  its  design  has  been  always  the 
same.  The  English  Revolution  of  1688  was,  in  fact, 
but  the  registration  of  the  supremacy  of  the  com- 
mercial and  industrial  order.  Modern  democracy  has 
indeed  operated  at  times  to  restrain  the  open  avowal 
of  this  purpose  that  the  Haves,  not  the  Have-nots,  shall 
control  the  purse,  and  has  even  succeeded  now  and  then 
in  setting  it  at  naught.  But  the  principle  still  persists, 
though  it  finds  its  defence  largely  in  constitutional  limita- 
tions upon  the  spending  powers  of  extravagant  legisla- 
tures 2  or  in  judicial  vetoes  upon  measures  menacing  the 
rights  of  property. 

Lastly,  the  universality  of  public  credit  must  be 
reckoned  among  the  noteworthy  attributes  of  the  financial 
constitution  of  to-day.  The  significance  of  the  late  rise  of 
public  credit  and  of  its  extension  parallel  with  the  growth 
of  the  political  power  of  the  propertied  classes  consists 
in  the  fact  that  "  when  property  owners  lend  to  the  gov- 
ernment they  lend  to  a  corporation  controlled  by  them- 
selves." 3     Public  debts  are  in  reality  mortgages  upon 

*  Public  Debts,  p.  8. 

*  Cf.  Bryce,  American  Commonwealth,  Ch.  XLIII. 

*  H.  C.  Adams,  Public  Debts,  p.  9. 


12  INTRODUCTION. 

all  the  industries  under  the  taxing  power  of  the  debtor 
government.  The  interest  on  these  debts  ordinarily  can 
be  paid  only  by  taxation.  Some  substantial  security 
against  repudiation  is  a  condition  necessarily  precedent 
to  the  employment  of  public  credit ;  and  this  security 
originated  and  consists  in  the  political  power  of  the 
propertied  classes.  Hence  the  origin  of  this  last  charac- 
teristic of  modern  public  finance. 

Financial  Systems  of  Classical  Antiquity. — That  the 
uniform  features  of  the  financial  constitution  of  modern 
states  are  no  historical  accident  needs  hardly  to  be 
proved.  But  to  show  exactly  how  the  modern  system 
came  to  be  what  it  is,  and  the  better  to  understand  its 
unique  nature,  it  will  be  useful  to  understand  in 
broad  outline  the  financial  regimes  of  other  and  earlier 
times.  The  first  political  experiments  worthy  of  study 
on  the  part  of  us  moderns  are  those  of  the  city-states  in 
Greece,  especially  those  of  Athens.  Here  as  elsewhere 
the  question  of  securing  material  support  for  the  state 
depended  in  great  part  upon  the  economic  and  political 
environment.  The  growth  of  industry  was  hampered 
by  various  causes.  The  institution  of  slavery,  itself  the 
outcome  of  war,  created  a  subject  class  frequently  more 
numerous  than  their  masters.  To  this  class  most  indus- 
trial pursuits  were  relegated.  Thus  a  social  odium  was 
attached  to  labor,  and  consequently  the  energy  of  the 
ruling  caste  was  largely  diverted  from  industrial  chan- 
nels.^ The  division  of  labor  was  but  rudimentary.  The 
family  organization  of  industry  largely  prevailed.  This 
involved  the  cultivation  of  agricultural  estates  by  means 
of  slave  labor,  and  the  fabrication  of  goods  for  the  use  of 
the  family,  including  the  slaves  and  dependents  of  the 
ruler  of  the  household.    The  main  outlet  for  commercial 

*  Ingram,  History  of  Political  Economy,  p.  ii. 


FINANCIAL  SYSTEMS  OF  CLASSICAL  ANTIQUITY.     13 

enterprise  was  foreign  commerce,  for  which  the  Greeks 
were  famous.  But  the  trading  and  industrial  spirit  did 
not  flourish  until  the  times  of  decadence,  and  was  viewed 
askance  by  the  most  enlightened  minds  of  that  day. 
Upon  such  an  economic  basis  no  enduring  financial 
superstructure  could  be  built.  The  springs  of  modern 
revenue  are  to  be  found  in  modern  industry.  To 
this  there  was  no  counterpart  in  Greece.  Revenue 
therefore  came  primarily  from  tribute.  The  Confederacy 
of  Delos,  for  example,  of  which  Athens  was  nominally 
the  president  but  really  the  master,  furnished  about  sixty 
per  cent,  of  the  city's  revenue.  The  rental  of  state  lands 
and  mines — especially  the  silver  mines  of  Sunion — to- 
gether with  port  dues  and  court  fines  furnished  the  resi- 
due. The  liturgies,  which  were  nominally  voluntary 
contributions  made  by  wealthy  citizens  to  provide  for  the 
city  public  games  and  spectacles,  were  in  reality  ex- 
actions upon  the  rich  enforced  by  the  ever  impending 
social  sanction  of  Ostracism.  But  no  regular  taxes  were 
laid  in  Athens  until  after  the  Peloponnesian  war,  when 
the  true  Athenian  spirit  had  largely  decayed. 

Rome  repeats  in  large  measure  the  story  of  Athenian 
finance,  except  on  a  broader  scale.  In  Rome  the  seeds  of 
slavery  were  implanted  at  the  time  of  the  earliest  con- 
quests over  neighboring  states.  The  free  peasantry, 
which  had  originally  been  the  bulwark  of  the  Roman 
state,  gradually  disappeared.  The  severity  of  the  mili- 
tary service,  coupled  with  the  largesses  of  corn  imported 
from  tributary  provinces,  led  to  the  sale  and  the  subse- 
quent unification  of  the  small  Italian  farms,  and  trans- 
formed the  free  peasantry  into  the  proletariat  of  the 
capital.  Nor  did  industry  or  navigation  have  for  the 
Latins  the  attractions  they  had  for  the  Greeks,  "  In- 
dustry, commerce,  and  navigation  were  mostly  in  the 


14  INTRODUCTION. 

hands  of  strang-ers.  The  Italians  themselves  had  no 
natural  liking  or  aptitude  for  those  pursuits  which  were 
the  delight  and  glory  of  the  Greeks,  the  Etruscans,  and 
the  Carthaginians.  Nor  was  this  the  case  only  in  the 
period  of  their  earlier  antiquity.  The  same  habits  pre- 
vailed when  the  city  of  Rome  had  become  the  centre 
of  a  power  that  ruled  the  world."  ^  In  Rome,  therefore, 
revenue  came  mainly  from  tribute.  Direct  property  taxes 
were  all  but  unknown  under  the  Republic  after  167  b.c. 
Even  in  the  time  of  Cicero  they  were  exceptional,  and 
were  not  infrequently  repaid.  If  enforced  military  ser- 
vice be  regarded  as  virtually  a  tax,  the  distribution  of 
the  burden  of  such  taxation  was  grossly  unjust.  The 
public  lands  rented  to  the  rich  were  let  at  a  nominal  rate. 
Moreover,  the  small  farmer,  who  when  absent  on  mili- 
tary service,  had  no  slaves  to  till  the  soil,  found  the  sacri- 
fice imposed  upon  him  crvishing  in  its  severity.  When 
Rome,  like  Greece,  had  sacrificed  liberty  for  security, 
regular  taxes  first  appeared.  Thus  a  heavy  land  and 
poll  tax  prevailed  under  the  empire.  Farmed  as  it  was 
by  the  rapacious  publicans,  it  destroyed  the  very  sources 
of  wealth.  By  its  severity  whole  districts  were  depopu- 
lated and  their  cultivation  was  frequently  abandoned. 
The  entire  process  of  taxation  illustrates  how  ignorance 
of  finance  and  economic  decay,  each  in  turn  a  cause 
of  the  other,  cooperated  to  disintegrate  the  empire.  In 
general  we  find  that  instead  of  a  normal  and  periodic 
activity  so  characteristic  of  the  state  of  to-day  there  pre- 
vailed a  haphazard  policy  equally  characteristic  of  the 
state  of  classical  antiquity.  Between  the  modern  and 
the  ancient  exercise  of  governmental  function  lay  all  the 
difference  between  a  steady  legitimate  business  voca- 
tion and  the  ups  and  downs  of  a  gamester.     Instead  of 

'Ihne,  History  of  Rome,  Vol.  IV.,  p.  216. 


FEUDAL   FINANCE.  t$ 

counting  upon  peace  as  a  normal  condition  of  industry, 
there  was  the  ever-impending  shadow  of  war.  The 
forces  of  the  antique  world  were  always  in  unstable  equi- 
librium. A  small  displacement,  instead  of  tending  to 
minimize  itself,  tended  to  overthrow  the  tottering  fabric 
of  the  state.  Prevision  was  only  a  vague  preparation 
for  apprehended  danger;  a  probable  forecast  of  income 
and  expenditure  on  the  part  of  the  state  was  impossible 
so  long  as  the  state  was  constantly  in  danger  of  having 
to  hazard  its  all  for  bare  existence.  Taxation,  therefore, 
as  we  now  use  the  term,  as  a  self-controlled  and  periodic 
contribution  exacted  from  the  citizen  for  the  support  of 
the  state,  was  then  practically  non-existent.  It  was  un- 
known in  the  period  of  self-government  in  the  ancient 
state,  and  only  its  prototype  appeared  in  the  final  period 
of  Roman  imperialism.  Forced  periodical  exactions 
did  prevail,  but  between  these  levies  and  modern 
taxation  there  are  perhaps  as  many  points  of  contrast  as 
of  resemblance.  Finally,  public  credit  was  then  virtually 
unknown,  inasmuch  as  the  conditions  necessary  for  its 
emergence  had  not  appeared. 

Feudal  Finance. — There  supervened  upon  the  disso- 
lution of  the  empire  an  economic  twilight  which  pre- 
vailed for  centuries.  The  universal  industrial  torpor 
enforced  by  the  separatist  tendencies  everywhere  prev- 
alent prevented  the  development  of  any  extensive  and 
enduring  financial  polity.  Agriculture  was  practically 
synonymous  with  industry.  Labor  was  performed  by 
serfs  whose  condition,  while  superior  to  that  of  the  slaves 
of  classic  times,  was  far  from  enviable.  They  were 
personally  free,  but  bound  to  the  soil  they  tilled.  The 
exchange  of  products  was  exceptional,  money  deahngs 
were  rare  ;  all  sorts  of  mechanical  trades,  save  the  rudest 
handicrafts,  were  unknown.    There  prevailed  a  '  natural 


l6  INTRODUCTION. 

economy  '  with  points  of  likeness  to  the  family  system 
of  Greek  industry,  but  without  its  political  enlighten- 
ment and  without  its  culmination  in  city  life.  Under 
such  conditions  finance  was  practically  the  ordering  of 
income  and  outgo  within  these  numberless  agricultural 
principalities.  It  was  farming  and  housekeeping  on  a 
great  scale.  The  feudal  analogue  to  the  financial  legis- 
lation of  the  present  is  to  be  found  in  the  Capitularies 
of  Charlemagne,  the  greatest  landlord  of  his  day.  These 
were  practically  nothing  but  directions  to  his  overseers 
for  the  management  of  his  estates.  The  feudal  view  of 
finance  was  just  the  opposite  of  the  modern  idea  of  the 
citizens  supporting  the  state  by  means  of  self-willed 
taxes.  In  feudal  times  the  lord  supported  his  subjects. 
He  held  a  claim  to  their  services  and  their  lands.  By 
right  and  custom  the  serf  owed  to  his  lord  so  many  days 
of  labor  per  week.  The  higher  vassals  owed  personal 
service  in  time  of  war.  In  fact  no  less  than  in  theory, 
the  lord  defended  and  supported  his  subject  vassals. 
There  was  no  distinction  between  the  treasury  of  the 
prince  and  the  public  treasury,  and  originally  the  only 
congener  to  modern  taxes  was  the  customary  service 
rendered  to  the  lord  of  each  petty  domain.  Later,  when 
commerce  began  again  to  expand,  the  territorial  princes 
established  their  claim  to  certain  regalian  rights  of  coin- 
age, and  of  tolls  on  market,  bridge,  and  highway,  but 
until  the  era  of  municipal  life  there  was  no  approach  to 
the  public  finance  of  to-day.  With  the  free  cities  came 
the  dawn  of  a  better  day. 

Early  Municipal  Finance. — Americans  easily  incline 
to  the  belief  that  city  growth  menaces  a  nation's  healthy 
political  life,  and  political  salvation  is  thought  to  be  of 
the  country.  In  this  we  generalize  perhaps  too  readily 
from  our  own  rather  dispiriting  experience  of  the  last 


E/1RLY  MUNICIPAL  FINANCE.  17 

fifty  years.  At  all  events,  whatever  limited  application 
this  idea  may  have  for  the  present  time  (perhaps  more 
limited  than  most  of  us  suspect),  we  ought  not  to  forget 
that  in  earlier  times  the  seed  of  liberty  on  the  continent 
of  Europe  was  preserved  mainly  in  the  cities  when  the 
rural  regions  were  given  over  to  a  hopeless  despotism. 
The  germ  of  constitutional  liberty  was  fostered  and  de- 
veloped not  in  the  country,  but  in  the  town. 

The  cities  of  western  Europe  boasted  various  his- 
torical origins.  Not  infrequently  a  temporary  market- 
place in  the  vicinity  of  a  cathedral  or  other  religious 
establishment  formed  the  nucleus  of  the  future  city.  The 
temporary  market  became  permanent.  The  authority 
of  the  territorial  superior,  lay  or  clerical,  was  not  infre- 
quently disputed  or  thrown  off  altogether.  Walls  sprang 
up  around  the  clustered  dwellings.  Grants  of  privileges 
were  accorded  by  a  compliant  prince,  or  purchased  from 
a  necessitous  suzerain,  or  wrung  by  force  from  an  obsti- 
nate overlord.  The  imperial  leanings  of  the  cities  were 
not  infrequently  the  outcome  of  municipal  rebellion 
against  the  claims  of  their  immediate  local  sovereigns. 
Local  autonomy,  however,  was  secured  in  one  way  or 
another  until  a  substantial  power  of  self-government  be- 
came the  heritage  of  the  Free  Cities.  Europe  was  then 
throbbing  with  the  pulsations  of  a  new  industrial  life. 
The  wealth  and  power  of  the  cities  grew  apace.  The 
famous  Hanseatic  League  (1250)  has  been  justly  termed 
the  precursor  of  the  modern  industrial  state.  It  lacked 
only  the  element  of  contiguous  territory.  It  made 
treaties  and  equipped  navies  and  waged  wars  like  a 
sovereign  power. 

All  this  was  but  the  reflection  of  the  growing  influence 
of  the  new  Estate, — that  of  the  industrial  classes.  Natu- 
rally enough  the  domestic  and  foreign  activities  of  the 


x8  INTRODUCTION. 

cities  implied  the  necessity  of  adequate  revenue.  This 
was  forthcoming  from  the  wealthy  burgher  class,  the 
dominant  order  in  these  municipalities.  Citizenship  had 
not  then  been  shorn  of  its  eminent  attributes.  It  was 
not  merely  a  paraphrase  for  territorial  residence.  It  was 
a  badge  of  status.  It  implied  ordinarily  the  headship 
over  a  household,  an  honorable  rank  in  the  gild  coun- 
cil, a  position  of  influence  in  civic  affairs.  '  With  a 
great  price  '  some  had  purchased  this  freedom.  And 
these,  equally  with  those  who  were  '  free-born,'  were  not 
of  the  stuff  quietly  to  see  their  property  disposed  of,  even 
in  the  service  of  the  city,  without  exercising  over  such 
expenditure  a  very  considerable  degree  of  control. 

Taxes  in  the  towns  were  at  first  self-willed  grants. 
They  soon  became  regular  instead  of  occasional.  Many 
of  the  refinements  of  later  financial  systems  were  antici- 
pated in  the  ordering  of  these  mvmicipal  exchequers. 
Taxes  were  levied  on  polls,  on  buildings,  even  on  articles 
of  consumption  ;  and  city  debts  were  founded.  Condi- 
tioned by  the  age  in  which  it  flourished,  municipal 
finance  was  the  forerunner  of  modern  finance,  except 
that  the  system  had  found  a  footing  only  in  isolated  cen- 
tres, instead  of  permeating  the  entirety  of  a  territorial 
state.  England's  task  it  was  to  secure  for  a  nation  what 
the  cities  had  secured  for  themselves  alone. 

The  Development  of  Financial  Constitutionalism  in 
England.  Norman  Finance.  — The  historical  signifi- 
cance of  English  finance  dates  from  the  Conquest 
(1066).  Feudalism  in  England  antedated  the  Norman 
invasion,  but  the  foundations  of  a  strong  central  govern- 
ment are  traceable  to  that  event.  Land  was  synony- 
mous with  wealth  and  power,  and  the  unification  of  land 
tenure  effected  by  the  Conqueror  had  a  momentous  in- 
fluence in  more  than  one  direction.     The  king  wa?  the 


THE  EXCHEQUER  SYSTEM.  19 

universal  landlord.  All  land  vested  ultimately  in  him, 
Domesday  book  was  at  the  same  time  the  record  of 
land-titles  and  the  basis  of  tax-apportionment.  Taxes 
were  but  little  more  than  the  payment  of  rent  to  a  royal 
landlord.  England  thus  presented  the  most  thorough- 
going example  extant  of  a  rigorous  feudal  regime.  This 
state  of  society  is  graphically  described  by  Bishop  Stubbs 
as  "  a  graduated  system  of  jurisdiction  based  on  land- 
tenure,  in  which  every  lord  judged,  taxed,  and  com- 
manded the  class  next  below  him,  in  which  abject  slavery 
formed  the  lowest,  and  irresponsible  tyranny  the  highest, 
grade,  in  which  private  war,  private  coinage,  private 
prisons  took  the  place  of  imperial  institutions  of  govern- 
ment." 

The  Exchequer  System.  —  The  financial  administra- 
tion of  the  realm  was  unified  under  a  single  royal  board 
or  commission — the  Exchequer.^  The  members  of  this 
body  were  generally  ecclesiastics  of  the  king's  house- 
hold— the  chancellor,  the  treasurer,  and  others.  Indeed 
the  Exchequer  was  originally  not  so  much  a  separate 
tribunal  as  it  was  the  king's  council,  the  curia  regis,  in 
fiscal  session.2  The  importance  of  this  institution  lay  in 
the  unification  and  simplification  of  English  fiscal  ad- 
ministration thereby  effected.  The  mould  was  cast  into 
which  the  molten  metal  of  constitutionalism  was  later 
to  be  poured. 

The  early  sources  of  the  royal  income  were  manifold. ^ 
The  fcrm  of  the  county,  or  land-tax,  was  exacted  by  the 
sheriff,    himself    a    royal    publican.      The    towns    paid 

^  The  name  originated  from  the  chequered  cloth  which 
covered  the  table  at  which  moneys  were  received.  Cf.  Stubbs, 
Cons.  Hist.,  I.,  p.  407. 

^  Stubbs,  Cons.  Hist.,  I.,  p.  418.  Its  records  exist  from  the 
time  of  Henry  H.,  so  that  we  have  the  sources  of  much  of  Eng- 
land's financial  history  for  a  period  of  six  hundred  years. 

"Stubbs,  Cons.  Hist.,  I.,  pp.  410-415. 


«0  INTRODUCTION. 

tallag-e.  The  king's  court  extended  its  jurisdiction  so 
as  to  acquire  additional  fees  for  the  crown.  The  feudal 
dues  were  required  from  time  to  time  of  the  king's  vas- 
sals; and  no  small  part  of  the  royal  revenue  came  from 
*  reliefs  '  paid  upon  the  succession  to  estates,  from  '  fines,' 
and  from  the  sale  of  offices. 

The  Origin  of  Popular  Control  over  Taxation. — Like 
all  English  constitutional  developments  the  growth  of 
popular  control  over  taxation  was  exceedingly  grachuil. 
In  Scutage  may  be  found  its  remote  origin.  Henry  II. 
in  the  prosecution  of  his  continental  wars  found  that  a 
feudal  army  was  often  an  uncertain  weapon  of  aggres- 
sion. The  vassals  of  the  king  at  the  expiry  of  the 
wonted  period  of  their  annual  service  insisted  upon  the 
right  of  returning  to  their  homes.  In  this  predicament 
it  is  said  to  have  been  the  famous  Thomas  Becket  who 
suggested  to  the  king  the  project  of  a  mercenary  army 
whose  pay  might  be  derived  from  the  commutation  of 
the  feudal  duty  of  personal  service  into  a  money  pay- 
ment. This  payment  in  lieu  of  service  was  called  scu- 
tage, or  shield-money ;  ^  and  upon  this  basis  of  compact 
followed  a  series  of  changes  so  important  in  their  out- 
come that  Thorold  Rogers  dubs  Becket  "  the  Father  of 
Parliament  and  scientific  finance."  Toward  the  close  of 
the  twelfth  century  additional  revenue  was  needed  to 
raise  funds  for  the  Crusades.  To  apportion  the  tax 
properly  among  the  holders  of  personal  estate  there  were 
instituted  in  connection  with  these  extraordinary  levies  " 
local  bodies  of  assessment.  Gradually  these  boards  of 
assessment  were  led  to  claim  that  their  assent  was  neces- 
sary to  the  validity  of  this  levy.     From  feudal  despot- 


*  Green,  Short  History  of  the  English  People,  p.  136. 
'The  Assize  of  Arms   (1181)   and  the  Saladin  Tithe   (1188). 
See  Dowell,   Hist,   of  Taxation  and  Taxes,  Vol.   I.,  p.   59  sq. 


THE  ORIGIN  OF  POPULAR  CONTROL  OVER  TAXATION.    2 1 

ism  there  had  emerged  first  the  vassal's  right  to  make  a 
money  composition  for  the  service  once  due  in  person, 
then  local  boards  of  assessment  which  gradually  became 
possessed  of  the  power  of  refusing  their  assent  to  royal 
impositions.  "  The  whole  subject  of  taxation,"  to  quote 
Bishop  Stubbs  ^  again,  "  illustrates  the  gradual  way  in 
which  king  and  people  were  realizing  the  idea  of  self- 
government.  The  application  of  a  representative  scheme 
to  the  work  of  assessment,  and  the  recognition  that  the 
liability  of  the  payer  was  based  on  his  own  express  con- 
sent, either  to  the  grant  itself  or  to  the  amount  of  his 
own  contribution,  mark  a  state  of  things  in  which  the 
concentration  of  local  interests  in  one  general  council 
was  all  that  was  needed  to  secure  the  taxpayer  from  arbi- 
trary treatment  on  the  part  of  either  the  sovereign  or  his 
ministers." 

The  first  popular  statement  of  the  essence  of  consti- 
tutional liberty  is  ordinarily  traced  to  Magna  Cliarta  ^ 
(1215).  The  Crown,  it  appears,  had  been  wont  to  amerce 
its  subjects  very  largely  at  its  discretion,  and  against  this 
evil  practice  the  barons  at  Runnymede  made  their 
memorable  protest.  Accordingly,  in  the  twelfth  section  of 
the  venerable  charter  the  king  agrees  that  "  No  scutage 
or  aid  ^  shall  be  imposed  in  our  realm  without  the  con- 
sent of  the  general  council  of  our  realm,  except  for  ran- 
soming our  person,  at  the  knighting  of  our  eldest  son, 
and  once  at  the  marriage  of  our  eldest  daughter;  and  on 
these  occasions  there  shall  be  paid  no  more  than  a 
reasonable  aid,"     The  charter  itself  was  afterwards  an- 


^  Stubbs,  Cons.  Hist.,  Vol.  I.,  p.  629. 

'  Stubbs,  Select  Charters,  p.  298.  An  English  version  will  be 
found  in  the  Appendix  of  Mr.  John  Fiske's  Civil  Government. 

'Aids  were  taxes  exacted  by  the  lord  from  his  vassal.  The 
three  customary  feudal  aids  are  here  mentioned. 


»3  INTRODUCTION. 

nulled,  but  this  essential  principle  was  caught  up  and 
reaffirmed  in  subsequent  royal  charters,  so  that  popular 
control  over  the  exactions  of  the  fisc  became  the  bed- 
rock of  the  English  constitution. 

The  Extension  of  Control  over  Taxation.  —  Subse- 
quent English  history  is  very  largely  the  reiteration  and 
actualization  of  the  right  of  self-government.  The 
power  of  the  throne  varied  with  the  character  of  its  suc- 
cessive occupants  and  with  the  changing  external  politi- 
cal environment.  But  the  seventeenth  century  saw  the 
principle  of  control  over  taxation  firmly  entrenched 
against  further  successful  attack.  The  action  of 
Charles  I.  in  raising  taxes  by  means  of  the  Ship  Writs 
was  not  an  actual  violation  of  early  usage,  though  the 
precedents  he  followed  had  been  made  obsolete  by  cir- 
cumstances. It  was  primarily  a  colossal  political  blun- 
der. Illegality  of  procedure  on  the  king's  part  may 
have  been  technically  absent;  but  the  strength  of  Hamp- 
den's case  (1637)  lay  not  so  much  in  its  impregnable 
legal  position  as  in  the  tremendous  popular  feeling  which 
stood  behind  it.  It  was  the  king's  inability  to  read  tb. ," 
signs  of  the  times,  to  understand  that  his  subjects'  loy- 
alty to  him  was  second  to  their  attachment  to  their 
property,  that  caused  Charles  to  lose  both  his  crown  and 
his  head.  The  Restoration  was  but  the  restoration  of 
a  reigning  family,  not  of  an  outgrown  theory  of  govern- 
ment; and  when,  as  the  outcome  of  the  Revolution  of 
1688,  William  was  called  to  the  throne,  '  commercial 
constitutionalism  '  had  become  once  for  all  the  unques- 
tioned law  of  the  land.  A  mercantile  people  had  come 
to  the  consciousness  of  itself.  The  political  power  of 
property  was  res  judicata.  The  conditions  were  present 
for  the  emergence  of  a  national  debt,  and  that  significant 
phenomenon  promptly  appeared. 


THE  GROIVTH  OF  CONSTlTUTlOhl/iLlSM.  i^ 

The  Growth,  of  Constitutionalism.  —  Self-government 
has  been  the  heritage  of  EngHshmen  abroad  as  well  as 
at  home.  The  American  colonists  brought  it  with  them 
across  the  Atlantic.  Indeed  our  own  struggle  for  inde- 
pendence was  but  the  reaffirmation  of  the  old  prin- 
ciple which  the  British  Crown  had  been  forced  long 
before  to  acknowledge  in  its  own  realm.  The  war  upon 
the  colonies  was  in  reality  an  attack  upon  the  constitu- 
tional freedom  of  Englishmen  in  a  new  habitat.  The 
attitude  of  the  mother  country  as  well  as  of  the  colonies 
with  respect  to  the  principle  at  issue  varied  most  illogi- 
cally  from  time  to  time  even  after  the  struggle  had  begun. 
But  the  truth  is  now  clear  that  the  asserted  right  to  tax 
the  colonies,  whatever  its  legal  justification,  was  but  a 
futile  attempt  to  impose  upon  Englishmen  beyond  the 
seas  a  yoke  which  neither  they  nor  their  fathers  had 
been  able  to  bear.  The  outcome  of  the  American  Revo- 
lution therefore  was  the  dissolution  of  the  political  unity 
of  English-speaking  people;  but  it  was  none  the  less 
the  maintenance  of  the  inviolate  sanctity  of  their  com- 
mon political  creed.  How  deep-seated  was  the  Ameri- 
can conviction  as  to  the  real  nature  of  the  issue  involved 
was  seen  in  the  unfailing  promptitude  with  which  the 
control  of  taxation  and  expenditure  was  asserted  in  the 
fundamental  law  of  the  various  commonwealths,  no  less 
than  in  the  two  great  federal  charters — the  Articles  of 
Confederation  and  the  Constitution.  However  far  we 
m.ay  be  from  the  perfect  realization  of  this  control  over 
the  public  purse — and  in  the  domain  of  municipal  life  we 
are  not  infrequently  mulcted  with  little  shadow  of  right 
— the  violation  of  this  principle  is  attempted  only  under 
the  forms  of  law  or  through  the  disguise  of  fraud. 
Formal  acquiescence  in  the  rule  of  popular  control  over 
the  spending  of  public  moneys  is  at  least  the  external 


24"  INTRODUCTION. 

obeisance  which  the  most  cynical  of  our  modern  poli- 
ticians never  fail  to  pay  to  the  political  traditions  of  their 
race. 

In  France  the  Revolution  of  1789  effected  the  first 
general  acknowledgment  of  the  right  of  popular  control 
over  national  income  and  expenditure.  Not  infrequently 
since  that  time  has  this  right  in  France  been  abridged 
or  abrogated,  but  after  its  many  oscillations  between 
Csesarism  and  Anarchy  the  French  nation  seems  to  have 
returned  to  the  settled  point  of  political  equilibrium. 
Upon  the  continent  of  Europe  generally  it  was  not  until 
after  the  various  revolutionary  movements  of  1848  that 
constitutionalism  in  its  modern  sense  secured  any  sub- 
stantial triumphs.  Even  now  the  stability  of  the  liberal 
order  is  threatened  no  less  by  Absolutism  than  by  Col- 
lectivism. Within  the  present  generation  Bismarck  has 
been  able  to  defy  the  mandate  of  the  legislature  in 
Prussia,  although  he  hastened  to  obtain  amnesty  for  this 
act  when  at  the  height  of  his  military  success  over  Aus- 
tria.i  But  though  menaced  on  this  side  and  on  that,  the 
dominance  of  the  property-owning  classes  in  modern 
governments  is  a  fact  of  the  first  order  of  importance. 
Together  with  the  normal  and  peaceful  functioning  of 
modern  governments  and  the  vast  extension  of  public 
credit,  it  forms  one  of  the  pillars  of  the  edifice  of  modern 
finance. 

'  Leroy-Beaulieu.  Science  des  Finances,  II.,  p.  15. 


PART   1. 

GOVERNMENT  OUTLAY. 

CHAPTER  I. 

THEORIES  OF  PUBLIC  EXPENDITURE. 

An  individual  who  determined  upon  his  expendi- 
ture before  estimating  his  income  would  be  charge- 
able with  counting  his  chickens  before  they  were 
hatched.  Yet  this  seemingly  inverted  procedure  is  war- 
ranted when  the  statesman  is  considering  the  subject  of 
public  finance,  and  for  the  following  reason:  Broadly 
speaking,  the  state  has  the  power  through  legal  coercion 
to  force  its  income  up  to  a  point  equal  to  its  requisite 
expenses.  The  individual  does  not  ordinarily  possess 
this  power,  and  he  must  consequently  regulate  his  living 
by  his  current  means.  "The  private  person  must  .  .  . 
regulate  his  expenditure  by  his  income:  the  state  regu- 
lates its  income  by  its  expenditure.  .  .  .  The  individual 
says,  '  I  can  spend  so  much  ':  the  finance  minister  says, 
'  I  have  so  much  to  raise.'  "  ^ 

The  vast  majority  of  all  state  enterprises  cost  money, 
and  consequently  state  expenditure  is  practically  co- 
extensive with  state  action.     Hence  it  follows  that  the 

^  Bastable,  Public  Finance,  p,  42.  Bastable,  however,  qualifit  s 
this  statement  materially. 


26  THEORIES  OF  PUBLIC  EXPENDITURE. 

question  of  the  proper  field  of  public  expenditure  is  prac- 
tically identical  with  the  question,  what  should  the  state 
do  and  what  should  it  leave  alone,  or,  as  it  is  sometimes 
more  formally  put,  what  is  the  '  sphere '  of  the  state  ? 

There  are  various  ways  of  '  determining '  this. 
There  is  the  '  liii:^Ji  priori '  method,  which  starts 
from  supposed  axiomatic  grounds  and  proceeds  de- 
ductively until  it  throws  the  meshes  of  its  logical  net 
upon  some  concrete  forms  of  state  activity.  There  is 
the  '  low  posteriori '  process,  which  hopes  by  the  endless 
sifting  of  '  facts  '  ultimately  to  establish  some  generaliza- 
tions which  may  serve  at  least  as  empirical  maxims  of 
statecraft.  Lastly,  there  is  the  so-called  '  historical  '  so- 
lution of  the  vexed  problem.  This  imports  into  the 
question  the  conception  of  the  gradual  evolution  of  state 
functions,  and  not  infrequently  uses  the  hackneyed 
analogy  of  an  '  organism  '  to  illustrate  the  presumable 
growth  of  the  body  politic.  All  these  modes  of  proce- 
dure doubtless  serve  a  useful  end.  Their  combination 
may  perhaps  enable  us  to  construct  a  valuable  theory  of 
the  province  of  government.  But  whatever  the  method 
adopted,  the  concrete  outcome  in  the  case  of  each  suc- 
cessive political  philosopher  is  generally  determined  by 
the  particular  forces  which  have  specially  operated 
upon  him.  If  we  disregard  chronological  sequence,  we 
can  readily  form  a  theoretical  catena  which  progressively 
magnifies  the  sphere  of  the  state  from  zero  to  infinity. 
Bakounine,  Spencer,  Adam  Smith,  J.  S.  Mill,  Roscher, 
Wagner,  and  Marx  form  such  a  series  in  which  each  name 
serves  to  indicate  a  new  departure  in  a  curved  path  which 
ultimately  slides  ofT  on  the  tangent  of  Collectivism.  If 
we  avoid  the  '  falsehood  of  extremes  '  we  shall  find  a 
very  general  acquiescence  in  the  belief  that  there  are 
some  things  which  state  action  is  likely  to  effect  with  a 


PRACTICAL   SOLUTION  OF   THE  QUESTION.  2.7 

balance  of  advantage  in  any  society.  These  things  are 
of  "  such  a  nature  that  the  profit  could  never  repay  the 
expense  to  any  individual  or  small  number  of  individuals, 
and  which  it,  therefore,  cannot  be  expected  that  any  in- 
dividual or  small  number  of  individuals  should  erect  or 
maintain."  ^  On  the  other  hand,  none  but  the  CoUec- 
tivists  will  deny  the  general  truth  that  there  are  many 
other  things  which  individual  enterprise  can  best  be  in- 
trusted to  secure.  But  sharply  to  draw  a  line  of  de- 
marcation between  these  contiguous  provinces,  even 
when  concrete  circumstances  of  time  and  place  are  taken 
into  consideration, — this  is  the  crux  of  political  specula- 
tion. 

Practical  Solution  of  the  duestion. — Happily  for  us 
we  are  not  required  to  solve  this  theoretical  question  in 
advance  of  enjoying  the  benefits  of  an  organized  polity. 
The  oft-recurring  issue  with  which  we  must  practically 
grapple  is  the  advisability  of  concrete  extensions  of  pub- 
lic expenditure.  Some  vague  presumption  for  or  against 
such  a  policy  may  result  from  the  general  theory  of  state 
functions  which  we  hold.  But  there  is  much  sense  in  Pro- 
fessor Ritchie's  remark 2  that  "when  any  measure  of  state 
action  is  proposed  there  is  little  advantage  to  be  got  by 
asking  whether  this  is  the  sphere  of  the  state,  or 
whether  it  is  meddling  with  the  sphere  of  the  individual. 
As  if  every  one  could  tell  beforehand,  without  any  par- 
ticular experience,  what  these  spheres  were.  They  are 
what  we  think  they  ought  to  be ;  and  they  are  not  neces- 
sarily mutually  exclusive.  It  is  much  better  to  ask  the 
utilitarian  question,  '  Is  this  particular  measure  expe- 
dient in  the  case  ?  '  "  The  best  working  hypothesis, 
therefore,  seems  to  be  this:  that  in  general  proper  public 

^Wealth  of  Nations,  Bk.  V.,  Part  III. 
•  Principles  of  State  Interference,  p.  107. 


»8  THEORIES   OF  PUBLIC  EXPENDITURE. 

outlay  is  such  as  is  normally  made  by  governments  at 
present,  and  that  any  proposed  extensions  of  expenditure 
(retrenchment  is  almost  too  good  to  hope  for)  must  each 
be  judged  on  its  own  account.  This  may  seem  like 
practically  begging  the  whole  question,  but  it  is  not  so 
in  reality.  State  outlay  is,  on  the  whole,  the  result  of 
political  experience.  That  it  normally  embraces  such 
and  such  objects,  and  normally  excludes  certain  other 
objects,  is  good  ground  for  the  presumption  that  such 
state  action  is  in  substantial  harmony  with  the  political 
and  social  environment.  "  Other  things  being  equal," 
says  Bagehot,  "  yesterday's  institutions  are  the  best  for 
to-day." 

This  modest  solution  of  the  problem  seems  also  to  in- 
clude within  itself  whatever  truth  or  import  may  lie  in 
the  doctrine  of  '  historical  relativity  ' — "  that  the  prov- 
ince, and  therefore  expenditure,  of  the  regulating  organs 
of  society  will  vary  at  different  stages  of  social  prog- 
ress." 1 

The  tests  of  any  proposed  extension  of  expenditure 
cannot  be  reduced  to  rule.  Sir  James  Fitzjames 
Stephen  ^  suggests  for  any  proposed  law  the  three  fol- 
lowing common-sense  criteria:  Is  the  object  arrived  at 
good  ?  will  the  proposed  means  attain  it  ?  will  they 
attain  it  at  too  great  expense  or  not  ?  The  third  prin- 
ciple will  sometimes  bar  out  mere  cheapness  as  a  con- 
trolling consideration.  In  public  economy,  no  less  than 
in  private,  niggardliness  is  often  worse  than  waste. 
Other  conditions  remaining  the  same,  however,  we  may 
agree  with  Ricardo  ^  in  lauding  "  the  golden  maxim  of 
M.  Say  that  the  very  best  of  all  plans  of  finance  is  to 


*  Bastable,  Public  Finance,  p.  48. 

*  In  Liberty,   Equality,   Fraternity,  p.   137. 
•"Works,  p.  14s  (McCulloch's  edition). 


THE  OBJECTS  OF  PUBLIC  EXPENDITURE.  29 

spend  little,  and  the  best  of  all  taxes  is  that  which  is 
least  in  amount."  ^ 

The  Objects  of  Public  Expenditure. — The  classifica- 
tion which  we  adopt  of  the  objects  upon  which  govern- 
ments spend  money  will  be  determined  by  various 
considerations.  One  classification  will  best  represent 
the  historical  growth  of  public  outlay,  another  will  best 
show  the  division  of  state  expenditure  in  a  particular 
nation,  and  still  a  third  will  be  found  most  useful  when 
we  attempt  to  collate  and  compare  the  expenditures  of 
different  governments  upon  analogous  objects.  In 
order  to  trace  the  historical  growth  of  state  expenditure 
we  may  conveniently  adopt  the  fourfold  division  of  out- 
lay upon  War,  Internal  Security,  Industry,  and  what, 
for  want  of  a  better  name,  has  been  denominated  Social 
Well-being.     In  earlier  times  the  citizen  rendered  per- 

'  Sax  and  others  of  the  Austrian  school  allege,  if  I  rightly 
understand  them,  that  the  Austrian  theory  of  value  gives  us  a 
scientific  basis  for  public  expenditure.  An  individual  who  will 
secure  the  maximum  satisfaction  from  his  income  must  derive 
from  the  last  (i.e.  the  least  important  or  esteemed,  not  chron- 
ologically the  latest)  dollar  spent  in  one  line  an  amount  of 
enjoyment  equal  to  that  secured  by  the  last  dollar  in  all  other 
avenues  of  outlay.  The  last  dollar  spent  for  theatre  tickets  must 
give  an  amount  of  enjoyment  exactly  equal  to  that  obtained  from 
the  last  dollar  spent  for  tobacco.  If  this  is  not  the  case  the 
'  economic  man  '  will  shift  a  part  of  his  outlay  from  one  cate- 
gory to  another,  say  from  tobacco  to  theatre  tickets,  to 
maximize  his  enjoyment.  Inasmuch  as  the  citizen's  income 
goes  partly  for  the  things  he  buys  himself  and  partly  (in  taxes) 
for  what  the  state  buys  for  him,  taxation  should  be  so  adjusted 
that  for  the  marginal  dollar  that  is  taken  by  way  of  taxation 
the  return  in  satisfaction  should  be  exactly  equal  to  that  ob- 
tained by  the  marginal  dollar  spent  privately.  This  appears  to 
me  to  be  undeniable,  and  if  by  implication  the  older  theorists 
denied  the  fact,  they  were  doubtless  grieviously  at  fault.  But 
how  to  determine  where  the  margin  between  private  and  state 
outgo  is  to  be  drawn,  or  how,  admitting  that  this  task  is  accom- 
plished, to  persuade  Tom,  Dick,  and  Harry  that  the  respective 
bounds  of  state  function  and  private  action  have  been  properly 
meted  out — on  these  points  our  Austrian  friends  do  not  greatly 
enlighten  us. 


30  THEORIES   OF  PUBLIC  EXPENDITURE. 

sonal  service  in  the  army,  and  took  part  in  the  adjudi- 
cation of  quarrels  between  members  of  his  own  tribe. 
These  occupations  have  become  speciaHzed  at  present, 
and  these  services  are  generally  rendered  by  specially 
deputed  public  agents  who  are  paid  from  the  public 
treasury.  Still  there  remain  traces  of  the  earlier  state 
of  things.  Some  military  services,  for  instance  those  of 
our  commonwealth  militia,  are  rendered  largely  without 
special  remuneration.  This  was  formerly  the  case  with 
all  military  service.  Various  civil  oflfices  are  still  held 
by  non-salaried  officials.  Not  until  society  had  de- 
veloped economically  did  the  state  make  any  extensive 
outlay  upon  industrial  interests.  But  the  estal)lishment 
of  weights  and  measures,  the  enforcement  of  commer- 
cial contracts,  the  coining  of  money,  the  granting  of 
patents,  the  protection  of  shipping  interests,  the  en- 
couragement of  certain  favored  industries,  and  latterly 
the  supervision  of  the  conditions  of  labor,  have  every- 
where become  public  charges.  More  recently  still  have 
modern  states  begun  to  expend  funds  upon  a  rapidly 
extending  circle  of  social  interests  of  which  education 
is  the  most  prominent  and  by  far  the  least  questionable. 
This  category  serves  as  a  sort  of  drag-net  for  all  public 
functions  which  cannot  be  classed  under  the  head  of 
Defence,  Internal  Security,  and  Industry.  It  includes 
the  care  of  the  defective,  delinquent,  and  indigent  classes, 
the  provision  of  public  luxuries  and  amusements,  anci 
in  some  states  the  portentous  establishment  of  industrial 
pensions. 

The  Universal  Growth  of  State  Expenditure. — That 
public  expenditure  is  everywhere  on  the  increase  is  in- 
disputable.i     A    certain    increase    with    the    growth    of 

*  Bastable,  Public  Finance,  pp.  133-138,  for  a  statistical  pres- 
entation of  the  recent  increase  of  expenditure  in  different  states; 


THE  UNiyERS/iL  GROIVTH  OF  STATE  EXPENDITURE.     3^ 

numbers  was  of  course  to  be  expected.  But  the  expan- 
sion of  public  outlay  seems  to  be  much  more  rapid  than 
the  general  growth  of  population.  Though  the  limits  of 
this  treatise  will  not  warrant  a  statistical  presentation  of 
the  case,  it  seems  not  improbable  that  the  increase  in 
public  charges  has  been  relatively  greater  than  the  nor- 
mal increase  in  the  typical  national  income,  even  after 
making  all  due  allowance  for  the  general  rise  in  prices 
and  for  the  increased  expenditure  by  the  state  upon 
projects  formerly  intrusted  to  individual  enterprise. 
But  more  than  this  is  true.  "  The  current  of  modern 
sentiment  runs  as  strongly  at  present  in  favor  of  state 
action  as  it  did  fifty  years  ago  against  it."  Nor  is  there 
any  difference  except  one  of  degree  in  the  practice  of 
English-speaking  peoples  and  other  peoples  whom  we 
are  inclined  to  regard  as  especially  devoted  to  the  fetich 
of  paternalism.  The  only  difiference  is  that  the  original 
impulse  with  us  was  popular  in  its  character:  in  the 
typical  continental  state,  on  the  contrary,  the  movement 
originated  largely  with  the  governments.  Nor  are 
Americans  a  whit  behind  England  in  this  movement. 
Mr.  Bryce  ^  tells  us  that  "  the  new  democracies  of 
America  are  just  as  eager  for  state  interference  as  the 
democracy  of  England,  and  try  their  experiments  with 
even  more  light-hearted  promptitude " ;  and  he  cites 
overwhelming  evidence  in  proof  of  his  contention. 

Our  political  doctors  have  frequently  analyzed  the 
causes  which  universally  have  increased  public  outlay, 
and  in  general  they  agree  in  their  diagnosis,  though 
they  frequently  difTer  in  the  emphasis  they  put  upon 
the  cooperating  factors.     Some,   hke   Leroy-Beaulieu  2 

also  Roscher,  Finanzwissenschaft,  §  no;  also  H.  C.  Adams, 
Science  of  Finance,  p.  87  sq. 

*  The  American  Commonwealth,  Ch.  XCI. 

*  Science  des  Finances,  Vol,  II.,  Ch.  VI, 


32  THEORIES   OF  PUBLIC  EXPENDITURE, 

and  Colin, 1  lay  the  greater  part  of  the  guilt  upon  the 
head  of  '  democratic  finance,'  which  they  apparently 
would  make  the  scapegoat  of  modern  politics.  Social- 
ism and  Nationality — the  latter  being  the  growing  con- 
sciousness of  national  unity  and  its  immoderate 
exaltation — are  jointly  responsible,  Prof.  H.  C.  Adams  - 
thinks,  for  the  phenomenon  in  question.  "  A  quickened 
moral  sensitiveness  and  philanthropic  sympathy,"  to- 
gether with  the  discernment  of  greater  benefits  which  the 
organized  power  of  government  can  secure,  constitute, 
in  Mr.  Bryce's  opinion,  the  main  causes  of  the  move- 
ment. Others  attempt  only  a  more  superficial  analysis, 
and  ascribe  the  increase  to  the  growing  costliness  of  the 
technical  apparatus,  especially  that  of  armament,  which 
governments  must  purchase.  Some  allege  that  the 
raised  standard  of  living  which  necessitates  an  increase 
in  the  salaries  of  state  functionaries  is  largely  respon- 
sible for  the  increase.  In  the  domain  of  municipal  gov- 
ernment in  the  United  States  a  part  of  the  increase  must 
doubtless  be  attributed  to  the  old-fashioned  sin  of  steal- 
ing. The  public  funds  of  our  cities  seem  to  have  a 
singular  tendency  to  become  the  spoil  of  what  Adam 
Smith  dubbed  *  that  crafty  and  insidious  animal '  called 
'  a  politician.' 

Perhaps  the  sanest  conclusion  is  that  all  these  causes, 
in  varying  proportions,  operate  in  modern  states  to 
produce  increased  public  expenditure.  It  is  diflficult, 
however,  to  make  any  rigid  classification  of  these  forces, 
inasmuch  as  they  insensibly  blend  into  each  other. 
Nationality,  when  it  becomes  a  mania,  unceasingly  de- 

*  Nationaloekoiioniie,  II.,  §  46. 

'  Public  Debts,  p.  14.  In  his  recent  Science  of  Finance, 
p.  94  sq..  Professor  Adams  rJcnics  that  taxation  absorbs  an  in- 
creasing fraction  of  the  public  income.  For  the  opposing  view 
§ee  Bfistable,  Public  Finance,  p.  137  sq. 


THE   UNIP^ERSy4L   GROIVTH  OF  STATE  EXPENDITURE.     33 

mands  costly  experiments  in  the  equipment  of  armies 
and  navies.  It  thus  lessens  the  productive  energy  avail- 
able for  ordinary  industry,  on  the  one  hand,  and  creates 
a  class  fed  at  the  public  crib,  on  the  other.  Thus  the 
military  establishment  first  arms  Socialism  with  a  valid 
complaint,  and  then  furnishes  it  with  a  vicious  model. 
New  Socialism  is  but  old  Militarism  '  writ  large.'  If  it 
cannot  provoke  a  foreign  war,  it  sets  itself  promptly  to 
the  work  of  internal  spoliation;  if  temporarily  precluded 
from  purchasing  battle-ships,  it  consoles  itself  with  sub- 
sidizing beet-culture  and  other  equally  important  in- 
terests. Both  tendencies  naturally  coincide  in  their  ad- 
vocacy of  extended  grants  of  pensions.  The  normal 
trend  of  modern  economic  life,  moreover,  does  operate 
undoubtedly  to  raise  the  standard  of  living,  and  thus 
necessitates  higher  salaries  for  public  officials.  City 
growth  also  involves  inevitably  increased  expenses  for 
police,  for  the  construction  and  maintenance  of  streets, 
for  the  supply  of  water,  and  for  the  thousand  and  one 
necessities  of  urban  life.  And  not  infrequently  a  sensibly 
relaxed  control  over  public  oflficials  increases  the  cost  of 
government.  It  would  be  markedly  hasty  to  pronounce 
dangerous  all  increased  outlay.  At  the  same  time  it  is 
proverbially  easy  to  spend  other  people's  money,  and 
legislators  no  less  than  electorates  need  frequently  to  be 
reminded  of  the  fact. 


CHAPTER    II. 
EXPENDITURE  IN  THE  UNITED  STATES. 

Federal,  State,  and  Local  Expenditure.  —  In  no 
modern  state  does  the  expenditure  of  the  central  or  na- 
tional government  comprise  more  than  a  part,  though 
frequently  a  great  part,  of  the  total  public  outlay.  The 
various  local  governments  are  charged  with  making 
supplementary  expenditures  which  are  devoted  to  inter- 
ests mainly  of  a  local  nature.  The  assignment  of  certain 
functions  to  the  national  government  and  to  the  sub- 
ordinate governments  respectively,  is  determined  in  each 
state  by  its  own  constitution.  We  find,  therefore,  great 
variety  of  detail  in  the  classes  of  charges  which  are  de- 
frayed in  various  states,  now  by  the  central  and  now  by 
the  local  governments.  Perhaps  no  general  law  can  be 
laid  down  to  explain  the  apportionment  of  expenses  to 
be  borne  by  each,  except  the  rather  vague  statement 
that  strong  centralizing  tendencies  and  the  absence  of 
vigorous  local  self-government  tend  to  throw  the  greater 
part  of  this  financial  business  upon  the  national  govern- 
ment.' 

Under  our  Constitution  cciiain  powers  are  delegated 
to  the  federal  government,  and  certain  other  powers  are 

'  Bastable.  Public  Finance,  p.  123,  note,  where  it  is  estimated 
that  the  ratio  of  local  expenditure  to  central  expenditure  in 
France,  Italy,  Great  Britain,  and  the  United  States  is  22,  25,  43, 
and  61  per  cent,  respectively. 

34 


FEDERAL,  STATE,   AND   LOCAL  EXPENDITURE.        35 

reserved  to  the  commonwealths  and  to  such  local  units 
of  administration  as  the  commonwealths  may  create. 
Thus  the  line  between  federal  and  non-federal  expendi- 
ture is  drawn  by  our  organic  law.  Two  jurisdictions, 
the  one  federal  and  the  other  that  of  the  commonwealth, 
cover  the  same  territory.  Thus  it  comes  about  that  both 
the  national  government  and  each  commonwealth  for  it- 
self maintains  a  civil  establishment  embracing  executive. 
legislative,  and  judicial  departments.  Beyond  this  du- 
plicated civil  establishment  a  broad  line  of  demarcation 
between  federal  and  non-federal  expenditure  may  readily 
be  drawn.  The  expenditures  of  the  federal  government 
are  made  mainly  for  national  purposes.  Here  are  in- 
cluded the  expenses  of  the  federal  military  and  naval 
establishments ;  the  former  covering  the  improvement  of 
harbors  and  rivers,  the  latter  the  cost  of  constructing 
new  vessels  of  war.  Besides  these  charges  the  interest 
on  the  national  debt,  the  payment  of  federal  pensions, 
the  maintenance  of  the  postal  service,  and  certain  other 
miscellaneous  objects,  among  them  the  Indians,  sum- 
marize the  remaining  items  resting  upon  the  federal 
budget. 

Non-federal  expenditure,  on  the  other  hand,  embraces 
the  appropriations  made  by  the  commonwealths  and  the 
various  local  governmental  units.  These  local  govern- 
ments include  the  counties,  municipalities,  townships, 
and  school  districts.  This  non-federal  expenditure  goes 
for  purposes  of  state  or  local  importance,  such  as  educa- 
tion, the  interest  on  state  and  local  indebtedness,  the 
support  of  charitable,  penal,  and  reformatory  institutions, 
police,  lighting,  the  construction  of  such  public  works 
as  streets,  sewers,  bridges,  and  waterworks,  the  pur- 
chase of  parks,  and  the  like. 

The  total  expenditure  by  governments  in  the  United 


36  EXPENDITURE  IN   THE  UNITED  STATES. 

States  is  over  one  billion  dollars  per  annum.  The  per 
capita  sum  expended  in  1890,  excluding  postal  expendi- 
tures, which  were  largely  reimbursed  by  postal  receipts, 
was  $13.65.^  It  is  a  matter  of  no  little  interest  to  notice 
how  the  various  governments,  federal,  state,  and  local, 
participate  in  the  expenditure  of  this  enormous  aggre- 
gate. 

The  Eleventh  Census  2  contains  the  following  table  of 
expenditures  made  in  the  United  States  in  1890: 

National  government,  including  postal  service $352,218,614 

States,  territories,  and  D.C.,  except  for  public  schools  77,105,911 
Counties,  except  for  public  schools,  partly  estimated  114,575,401 
Municipalities,  except  public  schools,  partly  estimated  232,988.592 
Public  schools 139.065,537 

Total $915,954,055 

A  minute's  scrutiny  of  these  figures  will  show  that 
about  forty  per  cent,  of  our  gross  public  expenditure  is 
made  by  the  federal  government.  This  is  a  relatively 
smaller  proportion  of  the  total  expenditure  than  we  find 
made  bv  the  central  government  in  Great  Britain  or  in 
the  continental  states.  It  serves,  however,  to  emphasize 
the  dominant  role  which  the  federal  government  plays 
in  our  constitutional  economy.  Compared  with  the  an- 
nual outlay  of  the  national  government,  the  expenditure 
of  any  single  state  or  municipality  shrivels  into  insignifi- 
cance. The  next  fact  to  be  noticed  is  the  comparatively 
small  financial   importance  attaching  to  our   common- 

'  See  U.  S.  Census  of  1890,  volume  on  Taxation  and  Valua- 
tion. These  figures,  prepared  by  Mr.  J.  K.  Upton,  special  agent 
of  the  Eleventh  Census,  are  particular'v  useful. 

'Volume  on  Taxation  and  Valuation.  The  separate  itemi- 
zation of  expenditures  upon  public  schools  was  necessitated  in 
part  by  the  fact  that  certain  commonwealths  raise  school  funds 
by  a  state  tax.  The  funds  so  raised  are  applied  to  the  main- 
tenance of  schools  in  the  various  localities  within  the  state. 


FEDERAL,  STATE,  AND  LOCAL   EXPENDITURE        37 

wealth  governments.  Less  than  one  tenth  of  the  total 
expenditure  goes  to  defray  the  cost  of  the  common- 
wealth governments.  The  truth  is  that  our  states  have 
been  shorn  of  most  of  their  financial  prestige.  They  still 
retain  their  constitutional  prerogatives.  They  are  still 
the  fountain  of  authority  from  which  the  financial  powers 
exercised  by  local  governments  are  legally  derived.  But 
they  are  themselves  of  secondary  moment  as  compared 
with  the  federal  government  on  the  one  hand  or  with  the 
aggregate  of  local  governments  on  the  other.  In  the 
magnitude  of  their  expenditure  several  of  the  common- 
wealth governments  are  overshadowed  by  the  great 
municipalities  within  their  borders. 

The  third  fact  that  the  statistical  table  indicates  is  the 
growing  prominence  of  local  and  especially  of  municipal 
finance.  From  an  historical  standpoint  so  marked  a 
contrast  between  federal  and  state  finance  is  very  note- 
worthy. The  net  ordinary  expenditures  of  the  federal 
government  during  the  first  decade  of  its  existence  aver- 
aged something  over  four  millions  of  dollars  annually. 
The  aggregate  commonwealth  expenditure  must  have 
been  nearly  as  much.  In  1842  the  net  ordinary  expendi- 
ture of  the  federal  government  was  $24,361,336.  In 
that  same  year  the  aggregate  commonwealth  indebted- 
ness was  over  two  hundred  millions,  upon  which  the  an- 
nual interest  must  have  been  equal  to  almost  half  of  the 
total  federal   expenditure  per  annum. 

It  is  true  that  1842  marked  the  culmination  of  the  in- 
ternal-improvement mania  on  the  part  of  the  common- 
wealths, and  so  the  figures  used  in  the  comparison  of 
state  and  federal  expenditure  for  that  year  may  be  re- 
garded as  abnormal.  Still  the  wholesale  embarkation  of 
the  commonwealth  governments  upon  enterprises  of  that 
nature  was  significant,  and  heightens  the  contrast  be- 


38  EXPENDITURE  IN    THE   UNITED  STATES. 

tvveen  their  daring  initiative  in  earlier  times  and  their 
severely  curtailed  powers  in  that  direction  to-day.  The 
growth  in  the  relative  power  of  the  federal  government 
and  the  rapid  increase  in  our  urban  population  have 
become  conniionplaces  long  since.  But  the  past  and 
present  financial  activity  of  the  federal,  the  state,  and  the 
local  governments,  as  shown  in  the  recent  Census  re- 
ports, give  another  striking  confirmation  of  these  politi- 
cal and  social  tendencies. 

Analysis  of  Federal  Expenditure. — The  tabulated 
summary  employed  in  official  reports  of  federal  expen- 
ditures is  divided  into  seven  sections  which  cover  re- 
spectively the  cost  of  the  civil  establishment,  the  military 
establishment,  the  naval  establishment,  the  Indian  ser- 
vice, pensions,  the  interest  on  the  public  debt,  and  the 
postal  service. 1  Most  of  the  items  are  self-explanatory, 
and  but  a  word  need  be  said  in  elucidation  of  the  others. 
The  civil  establishment  includes  the  salaries  paid  to  the 
officers  in  the  executive,  legislative,  and  judicial  depart- 
ments of  the  civil  service,  the  cost  of  foreign  intercourse, 
public  buildings,  the  collection  of  the  revenues,  the  ex- 
penses of  the  District  of  Columbia,  the  inevitable  deficit 
in  the  postal  revenues,  and  a  host  of  miscellaneous  ex- 
penses. The  military  establishment  includes  not  only 
the  current  expenses  of  the  maintenance  of  the  army, 
but  (as  already  mentioned)  the  improvement  of  rivers 
and  harbors,  the  erection  of  forts  and  coast  defences. 

Similarly  the  naval  establishment  comprehends  the 
construction  of  new  vessels  as  well  as  the  current  ex- 
penses of  the  navy.  The  postal  service  is  not  entirely 
self-supporting.      Such   revenue   as   is   received   by   the 


'  The  Annual  Reports  of  the  Secretary  of  the  Treasury  and 
the  Treasurer  of  the  United  States  give  detailed  accounts  of 
federal  receipts  and  expenditures. 


ANALYSIS  OF  FEDERAL   EXPENDITURE.  39 

post-office  department  goes  to  defray  the  cost  of  the 
postal  service;  the  remaining  deficit  is  made  good  by 
appropriations  which  are  charged  to  the  civil  establish- 
ment. 

Carefully  to  analyze  the  various  appropriations  of  the 
federal  government  would  require  an  amount  of  space 
which  the  limits  of  this  work  will  not  permit.  There 
are,  however,  several  salient  features  of  which  some 
notice  must  be  taken.  Briefly  put,  these  questions 
relate  to  the  salaries  paid  to  the  higher  offtcers  of 
the  government,  the  decreased  interest  charge,  the  in- 
creased cost  of  the  navy  and  of  war  pensions,  and  the 
likelihood  of  increased  federal  expenditure  generally. 

A  paid  legislature  such  as  our  Congress  is  necessarily 
an  expensive  body.^  The  payment  of  legislators  is 
based  on  the  democratic  idea  of  keeping  open  the  door 
of  political  preferment  to  men  of  ability  who  are  not 
rich.  The  number  of  salaried  legislators  makes  the 
aggregate  expense  of  our  national  legislative  mill  much 
greater  than  where  legislators  serve  gratuitously,  as  in 
England.  It  is  also  characteristic  of  democracies,  as 
Roscher  ^  observes,  that  while  the  average  pay  of  their 
public  functionaries  is  high,  there  is  less  difference  in 
the  pay  of  the  higher  and  lower  ranks  than  in  monarchic 
or  aristocratic  countries.  The  effect,  therefore,  is  two- 
fold :  not  only  are  the  legislatures  in  democratic  states 
a  heavy  charge  upon  the  revenue,  but  the  comparatively 
moderate  pay  of  the  legislators  serves  to  attract  rather 
mediocre  ability.  The  "  cheap  coin  of  honor "  may 
serve  in  part  to  eke  out  the  scantiness  and  the  uncer- 
tainty of  political  preferment,  but  at  the  same  time  the 
temptation  to  corruption  lurks  in  the  underpayment  of 

*  In  1896  the  cost  of  Congress  was  $7,736,610. 

•  Finanzwissenschaft,  p.  503. 


40  EXPENDITURE  IN   THE  UNITED  STATES. 

high  officials.  It  is  to-day  tolerably  certain  that  the 
highest  officers  under  the  federal  government  are  badly 
underpaid.  Especially  is  this  true  of  the  Cabinet  secre- 
taries, the  federal  judges,  and  the  members  of  Congress. 
Persistence  in  this  policy  of  niggardly  remuneration  out 
of  deference  to  supposed  democratic  principles  must  tend 
increasingly  to  allure  into  politics  little  men  for  whom 
the  present  remuneration  is  adequate,  or  wealthy  men 
for  whom  any  cash  remuneration  is  a  matter  of  com- 
parative indifference.  The  need  of  increased  pay,  more- 
over, is  more  urgent  in  the  judicial  department  than  in 
the  legislative  and  executive  departments,  where  the  few 
great  political  prizes  will  always  attract  a  large  number 
of  aspirants  into  the  arena  of  politics. 

The  recent  marked  increase  in  naval  expenditure  dates 
from  1889.  From  1886  down  through  1894  there  was 
a  steady  increase  in  the  outlay  upon  this  head,  the 
charges  advancing  from  $13,907,887  to  $31,701,293  per 
annum.  In  1897  they  mounted  to  $34,561,546,  and  since 
the  recent  war  they  have  tended  upwards,  the  estimates 
for  1900  being  over  $47,000,000.  The  view  one  takes  of 
this  form  of  government  expenditure  will  be  determined 
by  his  view  of  the  probable  use  of  the  navy  in  future. 
That  our  ships  and  armament  were  antiquated  and  needed 
replacement  can  hardly  be  denied.  But  where  the 
process  of  increasing  the  navy  will  stop  is  another  ques- 
tion. If  we  are  to  pursue  the  quiet  policy  of  doing  our 
share  of  policing  the  world's  waters,  of  enforcing  our 
own  revenue  laws,  of  having  an  armament  sufficient  for 
defensive  operations  and  large  enough  to  serve  as  a  nu- 
cleus of  an  enlarged  navy  in  case  of  need,  we  ought  to 
follow  a  conservative  policy  in  this  regard.  If  we  are 
to  assume  an  aggressive  attitude  in  our  foreign  policy, 
to   engage   readily   in   international   complications,   and 


AN/iLYSIS  OF  FEDERAL  EXPENDITURE.  41 

generally  to  play  the  role  of  enfant  terrible  in  the  family 
of  nations,  swollen  naval  outlay  is  the  proper  means  to 
attain  such  an  end. 

The  most  marked  changes  in  federal  expenditure  dur- 
ing the  last  thirty  years  have  been  the  decrease  in  the 
interest  paid  on  the  national  debt  and  the  portentous 
increase  in  the  payment  of  war  pensions.  The  other 
items  of  expenditure  have  shown  only  a  slow  variation. 
The  diminution  in  the  interest  charge  has  been  due  to 
the  rapid  reduction  of  the  debt's  principal.  The  sur- 
pluses over  current  expenditures  have  been  applied  in 
great  part  to  the  extinction  of  the  government's  bonded 
obligations.  Thus  in  1867  the  payment  on  interest  ac- 
count was  $143,781,591,  or  over  seventy  per  cent,  of  the 
net  ordinary  expenditures.  In  1893  there  was  but 
$27,264,392  paid  in  interest,  an  amount  less  than  eight 
per  cent,  of  the  net  ordinary  expenditures  for  the  same 
year.  During  the  year  1897-8  interest  charges  absorbed 
$37,585,056.  The  policy  of  debt  payment  will  be  dis- 
cussed in  another  place.  Whatever  be  said  of  our  fed- 
eral revenue  system  as  a  whole,  if  it  yielded  surpluses 
above  current  expenditures,  there  could  be  no  wiser 
policy  pursued  than  applying  these  surpluses  to  expunge 
the  national  debt. 

Federal  pension  expenditure  is  a  far  less  gratifying 
branch  of  national  finance.  As  the  interest  charge  has 
diminished,  war  pensions  have  steadily  increased,  so  that 
if  the  national  debt  as  well  as  the  disabilities  and  loss  of 
life  incurred  during  the  war  be  regarded  as  the  joint  re- 
sults of  that  struggle,  the  annual  charge  is  to-day  as 
heavy  as  it  has  ever  been.^     From  the  close  of  the  civil 

*  In  1867  the  aggregate  expenditure  for  pensions  and  interest, 
was  less  than  164  millions  of  dollars;  in  1898  the  aggregate  was 
over  147  millions.     These  figures  are  based  on  the  reports  of 


42  EXPENDITURE  IN   THE   UNITED  STATES. 

war  until  1880  pensions  never  absorbed  more  than 
thirty-five  millions  in  a  single  year.  In  1880  pension 
expenditure  increased  by  over  twenty  millions,  and 
reached  the  sum  of  eighty-seven  millions  in  1889.  Con- 
gress still  pursued  its  liberal  policy  with  the  following 
results : 

1890 106  millions  expended. 

1891 124    "^ 

1892 134    "       " 

1893 159    " 

1894 141 

1895 141 

1896 139    "       " 

1897 141 

1898 147 

The  increase  of  pensioners  on  the  rolls  was  as  follows: 

1889 489.725 

1890 537»944 

1891 676,160 

1892 876,068 

1893 966,012 

1894 ." 969.544 

1895 970,524 

1896 970,678 

1897 976,014 

1898 993.714 

Whatever  may  be  thought  of  our  present  pension 
policy  there  is  one  thing  undeniable,  that  if  our  pension 
policy  to-day  is  nothing  more  than  adequate  and  just, 

the  Secretary  of  the  Treasury.  It  must  be  borne  in  mind  that 
the  latter  reports  are  made  on  a  gold  basis,  whereas  prior  to 
1879  paper  currency  was  below  the  gold  par. 


ANALYSIS  OF  STATE  AND  LOCAL  EXPENDITURE.    43 

our  pension  policy  for  the  first  twenty  years  after  the 
civil  war  was  niggardly  in  the  extreme.  Indeed,  if  one 
had  no  evidence  other  than  the  pension  rolls,  one  might 
readily  draw  the  conclusion  that  there  had  been  since 
i860  two  wars  of  about  equal  magnitude,  the  latter  tak- 
ing place  some  time  in  the  early  nineties.  It  is  no 
hazardous  assertion  that  the  consensus  of  conservative 
opinion  holds  our  present  pension  expenditure  to  be 
exorbitantly  extravagant  and  excessive.  The  discour- 
aging feature  about  it  all  is  the  cowardly  subservience 
of  both  political  parties  to  the  clamant  pretensions  of 
the  advocates  of  extended  grants.  Nor  is  it  less  de- 
plorable that  for  this  evil  as  for  so  many  others  time 
seems  to  be  the  only  remedy.  To  repulse  invaders  from 
the  public  crib  is  indeed  difficult,  but  to  expel  them  when 
once  they  have  battened  thereat  is  all  but  impossible. 

Upon  the  general  question  as  to  how  rapidly  federal 
expenditure  in  the  aggregate  is  likely  to  increase,  little 
or  nothing  of  value  can  be  said.  Some  increase  is  to 
be  expected  with  the  growth  of  population.  More  is  to 
be  feared  from  the  adoption  of  some  of  the  many  schemes 
of  '  improvements  '  so  called  which  are  being  broached 
in  various  quarters.  Besides  the  normal  expenditure  of 
government  there  is  always  the  danger  of  war,  which  so 
frequently  throws  financial  calculations  to  the  winds. 
Economy  has  never  been  a  striking  virtue  of  legislators, 
and  if  the  future  reproduces  the  past  there  is  little  to 
warrant  any  golden  expectations  in  this  department  of 
finance. 

Analysis  of  State  and  Local  Expenditure. — Reference 
has  already  been  made  to  the  different  objects  upon 
which  federal  and  non-federal  expenditures  are  made. 
There  still  remains  the  task  of  separating  the  latter  into 
commonwealth  expenditure  proper  and  local  expendi- 


44  EXPENDITURE  IN    THE   UNITED  STATES. 

ture.  Here  again  the  subsidiary  character  of  what  is 
strictly  state  outlay  becomes  manifest.  Less  than  fif- 
teen per  cent,  of  the  non-federal  expenditure  in  1890 
went  to  defray  the  expenses  of  the  comonwealth  govern- 
ments. In  one  way,  perhaps,  this  statement  unfairly 
emphasizes  their  financial  insignificance.  More  than 
fifteen  per  cent,  of  the  total  amount  of  the  non-federal 
revenue  received  is  taken  in  by  the  commonwealths,  but 
they  in  turn  hand  over  a  great  part  of  these  receipts  to 
the  local  units  of  government.  Thus  in  1890  the  com- 
monwealth receipts  amounted  to  $116,157,640,  while  the 
expenditures  aggregated  only  $77,105,911.  The  diflfer- 
ence  between  these  sums  was  for  the  most  part  turned 
over  to  the  local  governments,  for  which  the  common- 
wealth acts  as  a  sort  of  tax-collector. 

Strictly  to  separate  the  objects  upon  which  the  com- 
monwealths and  the  local  governments  respectively 
spend  their  money  is  impossible.  Not  infrequently  both 
contribute  to  the  same  object,  as,  for  example,  to  edu- 
cation; and  not  infrequently  the  line  of  division  between 
state  and  local  expenditure  in  one  state  is  not  identical 
with  the  line  drawn  in  another.  Outside  of  this  common 
territory,  however,  the  commonwealths  defray  the  ex- 
penses of  their  own  civil  establishment  and  the  state  debt 
charge,  and  very  generally  bear  the  brunt  of  such  public 
burdens  as  the  care  of  the  defective  classes,  the  deaf- 
mutes,  the  blind,  and  the  insane;  the  cost  of  reforma- 
tories, the  state  militia,  and  the  expenses  of  various  state 
boards  or  commissions,  such  as  railroad  commissions, 
insurance  commissions,  tax  commissions,  and  the  like. 

The  cost  of  all  other  objects,  mainly  local,  is  met  by 
the  various  local  governments.  Here  are  included  such 
charges  as  education,  police,  the  fire  department,  con- 
struction of  streets,  bridges,  sewers,  lighting,  water-sup- 


/tNALYSIS  OF  STATE  AMD  LOCAL  EXPENDITURE.   45 

ply,  and  sanitation.  A  list  taken  from  the  last  U.  S. 
Census,  giving  state  and  local  expenses  for  1890,  runs  as 
follows : 

STATE   AND    LOCAL    EXPENDITURE,    189O, 

Education $145,583,115 

Roads,  bridges,  and  sewers 72,262,023 

Interest 46,649,139 

Charity 39,958,816 

Other  salaries  and  commissions.  .  37.552,655 

New  buildings 34,513,020 

Police 23,934,376 

Judicial,  including  county  courts  18.721,383 

Buildings  and  maintenance 17,950,177 

Fire  departments 16,423,820 

Penal  and  reformatory 12,381,425 

Lighting 11 ,363,780 

Water-works 5oi7,i93 

Executive 5,476,940 

Legislative 3.987.774 

Health  Departments 3,280,294 

Parks 2,962,697 

Military 2,692,21 1 

Miscellaneous 68,041 ,796 


$569,252,634 


Education  easily  leads  all  other  charges  in  point  of 
magnitude,  amounting  to  about  one  fourth  of  the  total 
non-federal  expenditure.  The  increase  in  this  department 
has  been  very  rapid,  the  per  capita  outlay  upon  pupils  en- 
rolled increasing  from  $7.99  to  $11.03  i"  the  decade  from 
1880  to  1890.  Education  is  much  more  liberally  sup- 
ported  in  the   North   and   West   than    in   the   southern 


46  EXPENDITURE  IN  THE  UNITED  ST/ITES. 

states,  the  per  capita  expenditure  in  the  South  being 
less  than  half  the  same  expenditure  elsewhere  in  the 
United  States.  The  various  sections  of  the  country  differ 
also  in  regard  to  higher  education.  The  colleges  and 
universities  of  the  East  are  largely  upon  private  or  de- 
nominational foundations,  whereas  in  the  West,  and  also 
to  a  certain  degree  in  the  South,  the  state  generally  sub- 
sidizes higher  education.  One  of  the  vexatious  ques- 
tions attaching  to  the  public  support  of  education  is  the 
demand  made  by  certain  religious  denominations  for  a 
division  of  the  school  funds.  The  number  of  denomi- 
nations makes  religious  instruction  in  the  public  schools 
practically  impossible.  Non-religious  education  is  re- 
garded by  many  as  substantially  irreligious  education. 
Consequently  their  only  escape  is  to  send  their  children 
to  private  or  denominational  schools.  This,  they  claim, 
subjects  them  to  what  is  practically  double  taxation  for 
the  education  of  their  children.  Hence  they  demand  a 
pro  rata  division  of  school  funds.  Their  main  conten- 
tion may  or  may  not  be  true.  But  even  from  a  purely 
secular  point  of  view  it  seems  deplorable  that  the  public 
schools  give  no  instruction  in  religion.  A  via  media  has 
been  suggested  which  would  maintain  the  integrity  of 
the  present  public  school  system,  but  would  provide  for 
adequate  religious  instruction  for  all  denominations. 
The  clergy,  it  is  proposed,  shall  take  for  a  certain  time 
each  week  the  place  of  the  regular  teaching  staff  and  give 
instruction  in  religion;  this  would  allow  each  denomi- 
nation to  have  its  own  religious  instruction  in  the 
schools.  Moreover,  it  is  not  unlikely  that  such  instruc- 
tion would  be  given  without  additional  expense  to  the 
state,  each  denomination  defraying  the  expenses  of  its 
own  clerical  teachers.  Special  provision  might  be  made 
for  such  as  do  not  desire  their  children  to  receive  any  re- 


ANylLYSIS  OF  STATE  AND  LOCAL   EXPENDITURE.    47 

ligious  teaching  whatever.  Some  such  compromise  is 
certainly  preferable  to  a  double  school  establishment, 
parochial  and  secular,  with  its  attendant  difficulties. 

Next  to  education,  the  construction  of  various  public 
works  and  improvements  absorbs  the  greatest  share  of 
local  revenues.  Here  are  included  roads,  streets,  bridges, 
sewers,  and  the  like.  The  policy  of  special  assessments 
seems  to  be  a  rough  approximation  to  justice  in  dis- 
tributing the  charges  for  local  improvements  between 
such  property  owners  as  are  specially  benefited  thereby 
and  the  general  public.^ 

Next  in  order  of  size,  comes  the  payment  of  interest 
upon  the  indebtedness  of  the  states  and  local  govern- 
ments. The  principal  of  this  indebtedness  amounted  in 
1890  to  $1,135,210,442.2  Ten  years  before  it  stood  at 
$1,123,278,647.  The  increase  in  the  last  census  decade 
therefore  has  been  comparatively  slight,  and  the  per 
capita  indebtedness  has  actually  decreased  from  $22.40 
to  $18.13.  The  outlook  on  this  account  is  accordingly 
reassuring.  If  the  productive  assets  of  the  state  and  local 
governments  be  taken  into  consideration,  the  amount  of 
their  indebtedness  becomes  still  less  serious.^  The  only 
remaining  item  of  expenditure  of  which  we  need  take 
special  note  is  that  of  Charity.  As  has  been  already 
intimated,  this  charge  for  the  support  of  the  insane  and 
physically  defective  classes  falls  mainly  on  the  state  gov- 
ernments. Poverty  is  relieved  mainly  by  the  local 
governments.     These  objects  are  liberally  provided  for. 

*  Rosewater,  Special  Assessments,  pp.   137-145. 

'Its  distribution  is  as  follows:  (U.  S.  Census,  1890,  Pub- 
lic Debt.) 

State  debt $228,997,389 

County  debt 145.0^8.045 

Municipal   debt 724,463,060 

School  district  debt 36,701,948 

'Ely,  Taxation  in  American  States  and  Cities,  p.  514,  noH, 


48  EXPENDITURE  IN  THE  UNITED  STATES. 

Mr.  Bryce  ^  has  cited  "  the  influence  of  a  quickened 
moral  sensitiveness  and  philanthropic  sympathy  "  as  one 
of  the  main  causes  which  have  operated  to  increase  ex- 
penditure generally.  And  certainly  it  is  operative  in  this 
particular  province  of  public  spending.  "  The  sight  of 
preventable  evil,"  he  tells  us,  "  is  painful  and  felt  as  a 
reproach.  He  who  preaches  patience  and  reliance  upon 
natural  progress  is  thought  callous.  The  sense  of  sin 
may,  as  theologians  tell  us,  be  declining;  but  the  dislike 
to  degrading  and  brutalizing  vice  is  increasing:  there  is 
a  warmer  recognition  of  the  responsibility  of  each  man 
for  his  neighbor,  and  a  more  earnest  zeal  in  works  of 
moral  reform." 

Upon  the  general  subject  of  the  future  of  municipal 
and  state  expenditure  more  can  be  said  than  upon  the 
same  question  when  raised  in  connection  with  federal 
finance.  The  reason  is  twofold.  The  functions  of  state 
and  local  governments  are  less  likely  than  those  of  the 
federal  government  to  be  alTected  by  the  perturbations 
of  international  politics.  Secondly,  the  trend  of  constitu- 
tional law  is  certain  as  regards  spending  by  legislatures 
and  municipalities.  Restrictions  upon  the  use  of  the 
credit  of  the  commonwealth  or  the  local  governments, 
as  well  as  on  their  spending  powers,  are  found  in 
most  state  constitutions.  Such  provisions  are  almost 
inevitably  inserted  when  a  new  constitution  is  framed. 
"  One  feels,  in  reading  these  multiform  provisions,  as  if 
the  legislature  was  a  rabbit  seeking  to  issue  from  its 
burrow  to  ravage  the  crops  wherever  it  could,  and  the 
people  of  the  state  were  obliged  to  close  every  exit  be- 
cause they  could  not  otherwise  restrain  its  inveterate 
propensity  to  mischief."  ^    The  small  aggregate  increase 

^  Bryce,  American  Commonwealth.  Chapter  XCI. 

^  Ibid.,    Cb-    XLIII.      See   also    Ely,    Taxation    in    American 


/IM ERIC  AN  AND  FOREIGN  EXPENDITURE.  49 

in  non-federal  indebtedness  between  1880  and  1890  is 
significant.  Indeed  there  seems  some  reason  for  hoping 
that  extravag^ance  in  state  and  local  spending  is  almost 
under  control,  and  that  whatever  increase  takes  place  in 
future  will  be  warranted  largely  by  the  growth  of  popu- 
lation and  by  the  necessity  of  meeting  such  new  require- 
ments as  may  arise. 

Comparison  of  American  and  Foreign  Expenditure. — 
It  remains  to  compare  the  aggregates  of  expenditure  in 
America  and  in  foreign  countries,  and  also  their  respective 
allotments  of  money  for  similar  public  purposes.  The  de- 
termination of  the  money  sums  paid  out  by  various  states 
is  a  comparatively  easy  matter,  but  the  inferences  drawn 
from  such  statistics  are  very  liable  to  be  misleading.  It 
is  certain,  for  example,  that  the  aggregate  expenditure 
in  the  United  States,  federal,  state,  and  local,  exceeds 
the  aggregate  spent  by  any  other  modern  state.  But 
even  this  tells  us  very  little.  To  afiford  any  approximate 
basis  of  comparison  we  must  determine  first  the  per 
capita  expenditure  made  in  various  states,  and  then 
translate  this  per  capita  money  sum  into  the  commodi- 
ties it  will  purchase  in  various  states.  This  per  capita 
amount  in  standard  commodities  must  then  be  compared 
with  the  per  capita  income  expressed  in  the  same  com- 
modities. Even  then  certain  corrections  must  be  made. 
Allowance  for  compulsory  military  service  is  a  correc- 
tion of  the  first  order  of  importance.  Moreover,  the 
relative  functions  performed  by  various  states  must  be 
taken  under  consideration  in  order  properly  to  weight 
the  balances  of  comparison.  A  state  that  purchases  and 
operates  railroads  will  make  a  large  nominal  expenditure 


States  and  Cities,  pp.  508,  509.  Some  state  constitutions  forbid 
municipal  debts  to  exceed  a  certain  fixed  percentage  of  the 
property  valuation  of  the  cities  within  the  state. 


50  EXPENDITURE  IN   THE   UNITED  ST/ITES. 

for  interest  on  the  purchase-money.  But  the  citizen  of 
that  state  will  perhaps  have  the  benefit  of  lower  trans- 
portation rates,  and  thus  iie  state's  expenditures  will 
really  cover  what  in  other  countries  would  be  a  part  of 
the  private  citizen's  expenses  of  transportation.  So 
serious  are  all  these  difficulties  that  a  statistical  presenta- 
tion of  the  relative  weight  of  expenditure  in  various 
states  is  liable  to  be  vague  or  deceptive.  Perhaps  the 
most  we  can  venture  to  assert  is  that  expenditure  is  less 
heavy  in  newly  developing  economic  connnunities,  per- 
haps because  of  the  relative  ease  of  obtaining  a  livelihood 
than  because  of  special  economy  or  prudence  in  laying 
out  the  public  funds. 

The  question  of  the  distribution  of  expenditure  upon 
dififerent  objects  in  various  states  is  more  readily  solved. 
Here  the  United  States  presents  a  contrast  to  most  Euro- 
pean states  in  spending  strikingly  less  for  defence  and 
for  the  interest  upon  its  public  indebtedness,  and  mark- 
edly more  upon  education,  than  they.  It  is  estimated  * 
that  the  expenditure  upon  public  defence  (mainly,  of 
course,  in  support  of  the  war  establishment)  absorbed 
in  1888-9  o^  the  total  public  outlay  in  Great  Britain,  in 
France,  and  in  Prussia  12.40,  19.27,  and  17.50  per  cent, 
respectively.  In  the  United  States,  if  we  except  the  ex- 
penditure on  rivers  and  harbors  (which  is  put  ordinarily 
among  the  expenses  of  the  War  Department),  the  total 
cost  of  defence,  including  the  building  of  new  ships  of 
war,  took  but  little  over  six  per  cent,  of  the  total 
national,  state,  and  local  expenditure  in  1890. 

For  fear  that  such  a  showing  may  seem  too  favorable, 
we  ought  to  remember,  first,  that  our  geographical  posi- 
tion secures  us  from  foreign  aggression ;    secondly,  that 

*  Conrad,  Handwcirtcrbuch  der  Staatswissenschaften,  article 
Fjinanzen,  Vol.  III.,  p.  458.    The  estimate  is  Kaufmann'g, 


AMERICA M  At^D  FOREIGN  EXPENDITURE.  gt 

the  cost  per  man  in  the  federal  army  and  navy  is  very 
large  as  compared  with  analogous  expenditure  abroad; 
thirdly,  that  the  tendency  o£  late  has  been  rapidly  to  in- 
crease the  yearly  expenditure  upon  the  navy;  and  lastly, 
that  the  enormous  pension  expenditure  is  quasi-defensive 
outlay.  If  war  pensions  were  classed  among  our  ex- 
penses for  defence,  the  absolute  and  relative  amount  in 
money  spent  on  that  score  would  be  greater  here  than 
in  any  other  modern  state. 

The  total  expenditure  in  the  United  States  to  defray 
the  interest  upon  public  debt  is  in  marked  contrast  to 
what  we  find  abroad.  In  1890  the  interest  charge  ab- 
sorbed little  over  nine  per  cent,  of  the  total.  In  1888-9 
in  France  the  interest  charge  absorbed  23.74  per  cent, 
and  in  England  16.94  per  cent,  of  the  aggregate  expendi- 
ture. The  comparison  would  be  more  notably  in  our 
favor  if  we  compared  the  expenditures  merely  of  the 
central  governments  in  these  three  states. 

Most  gratifying,  finally,  is  the  comparison  of  the  ex- 
penditure which  our  gi)vernnicuts  and  foreign  govern- 
ments make  upon  education.  In  1890  about  sixteen  per 
cent,  of  the  aggregate  outlay  in  the  United  States  went 
for  educational  purposes.  In  Great  Britain  less  than  six 
per  cent.,  in  France  less  than  ten  per  cent.,  in  Prussia 
but  little  over  ten  per  cent,  was  expended  upon  the  same 
object  in  1888-89.^  Moeover,  it  is  noticeable  that  in 
France  and  Germany  a  great  portion  of  the  sum  spent 
was  devoted  to  higher  education,  whereas  the  great  bulk 

*  In  Prussia  in  1882-3  more  was  spent  for  higher  education 
than  for  popular  education,  the  cost  of  the  latter  being  defrayed 
in  part  by  the  fee  system.  The  French  expenditure  on  higher 
education  exceeded  that  on  popular  education  in  1883.  Roscher, 
Finanzwissenschaft,  p.  532.  The  French  have  recently  begun 
to  follow  the  American  and  English  procedure  in  regard  to  the 
apportionment  of  funds  devoted  to  educational  purposes. 
Schonberg,  Handbuch  der  Polit.  Oek..  p.  52. 


52  EXPENDITURE  IN   THE  UNITED  STATES. 

of  American  and  English  expenditure  goes  for  primary 
education.  This  last  comparison  brings  out  what  is  un- 
doubtedly the  most  promising  feature  in  our  public  ex- 
penditure. 

EXPENDITURES    OF    THE    NATIONAL,    STATE,    AND    LOCAL 
GOVERNMENTS    IN    THE   UNITED    STATES,    189O. 

(U.  S.  Census  of  1890.) 

Pensions  and  other  charities $146,895,671 

Educational  purposes  and  public  schools i45-583,iiS 

Interest   on   debt 82,748,423 

Roads,  bridges,  sewers,  and  ditches 72,262,023 

Postal    service 66,259,547 

Public  buildings  and  sites  ' 38,890,970 

Salaries,  fees,  and  commissions 37-552,655 

Military   purposes 35.537,6ii 

Police 23,934,376 

Judiciary 23,071,075 

Public  buildings  and  maintenance  ^ 17,950,177 

Executive  department 16,770,801 

Fire 16.423.820 

Naval  establishment,  except  for  nevvr  ships 15,174,403 

Penal   and  reformatory   institutions 12,381,425 

Improving   rivers   and   harbors 11,737,438 

Lighting 11,363,780 

Congress   and   legislative 10,485,826 

Constructing  new  war  vessels 6,831,803 

Indians 6,708,047 

Health    departments 3,280,294 

Public  parks  and  places 2,962,697 

Foreign    intercourse 1,648,277 

Miscellaneous 109,499,801 

Total $915,954,055 


^  Construction  and  purchase  separately  reported. 

*  Construction  and  purchase  not  sepaniiely  reported. 


PART   II. 

G0^E:i?j:4:^NT  income. 

CHAPTER  I. 
TAXATION  :    ITS    ESSENTIAL    NATURE. 

Different  Sources  of  State  Income. -/-To  meet  its  ex- 
penses the  government  must  secure  ah  income.  This 
income  it  obtains  mainly  in  two  ways — by  taxation  and 
by  managing  certain  business  enterprises.^  /Of  the  pub- 
lic revenue  at  the  present  time  by  far  the  greater  part 
comes  from  taxes.  \  Certain  undertakings,  however,  the 
state  carries  on,  and  from  them  derives  an  additional  in- 
come. Thus  the  delivery  of  the  mails  and  the  perform- 
ance of  certain  other  services,  such  as  supplying  water 
in  cities,  are  examples  of  the  industrial  pursuits  of 
the  state.  Not  infrequently,  too,  the  operation  of 
the  railroad  system  or  the  telegraph  system  is  in  the 
hands  of  the  state.  Between  these  two  generic  kinds 
of  income  there  is  one  marked  difference.    |  Taxes  are 

^  For  the  sake  of  brevity  it  is  here  convenient  to  regard  the 
productive  property  of  the  state  as  an  enterprise  whose  yield 
is  due  to  state  management  and  supervision.  Public  income 
arising  from  fines  is  small  and  may  be  neglected.  For  a 
thoroughgoing  but  somewhat  complex  subdivision  of  public 
indome  see  Seligman,  Essays  in  Taxation,  p.  303;  H.  C.  Adams, 
Science  of  Finance,  pp.  219-228. 

53 


54  TAXATION:  ITS  ESSENTIAL   NATURE. 

compulsorily  exacted,  generally  without  the  rendition 
of  any  specific  equivalent  to  the  taxpayer,  i  Not  so 
with  the  other  part  of  the  government's  income.  This 
is  obtained  by  the  state's  performance  of  specific  services 
or  its  sale  of  specific  commodities  for  money.  Inasmuch 
as  this  is  a  very  connnon  way  for  individuals  to  obtain 
their  living,  it  has  been  proposed  to  call  public  income 
analogously  derived  the  quasi-economic  income  of  the 
state,  in  contrast  to  the  state's  revenue  derived  from 
taxation.  Another  name  for  this  quasi-economic  income 
is  contractual  income,  so  called  because  such  income  in- 
volves ordinarily  a  contract  between  the  government  and 
the  individuals  who  patronize  public  industrial  enter- 
prises. It  must  not  be  imagined  because  the  amount 
now  obtained  by  taxation  far  exceeds  the  quasi-economic 
income  of  the  government  that  the  latter  always  has  been 
of  secondary  hnportance.  Indeed  in  earlier  times  under 
the  feudal  regime  ^  taxes  were  of  minor  importance,  and 
the  greater  part  of  the  public  income  was  quasi-economic 
in  its  origin.  Moreover,  it  seems  not  at  all  impossible 
that  the  quasi-economic  income  of  governments  may 
take  on  increasing  importance  in  the  future.  Certain 
continental  states  derive  considerable  revenue  from  their 
public  domain  and  from  public  industries.  European 
cities  frequently  defray  a  substantial  part  of  their  ex- 
penses by  means  of  their  quasi-economic  receipts.  Thus 
Berlin  from  its  gas  works  alone  obtains  net  profit  enough 
to  cover  about  six  per  cent,  of  the  city's  annual  ex- 
penses.^  Paris  derives  over  (^ne  fifth  of  its  revenue  from 
public  services  and  from  productive  property  owned  by 
the  city.     Some  think  that  "  we  can  discern  a  tendency 


'  See  page  i6. 

'  Cf.    Shaw,    Municipal    Government  in   Continental    Europe, 
pp.  471*  472. 


NATURE   OF    TAXES.  55 

in  taxes  to  occupy  a  place  of  relatively  decreasing  im- 
portance even  in  American  budgets,"  but  this,  while  pos- 
sible in  municipal  budgets,  is  very  unlikely  as  regards 
the  federal  government  or  the  state  governments.^  The 
consideration  of  these  quasi-economic  receipts  in  detail 
will  follow  the  study  of  taxation. 

Nature  of  Taxes.-+The  word  taxation  covers  the  proc- 
esses both  of  collectrng  and  paying  taxes,  and  a  tax  is  a 
legal  exaction  made  by  the  government  upon  its  sub- 
jects for  public  ends.  This  definition  includes  every- 
thing essential  to  a  tax — its  coercive  character,  its 
bearers  or  supporters,  and  its. specific  purpose. ^  Mr. 
John  Fiske's  definition  will  serve  as  a  terse  and  graphic, 
though  somewhat  elliptical,  description :  "  Taxes  are 
portions  of  private  property  taken  for  public  pur- 
poses.    3 

I  It  is  absolutely  essential  to  grasp  the  idea  clearly  that 
'  a  tax  is  always  a  burden  upon  some  particular  person 
or  persons.  There  never  was  a  tax  which  did  not  saddle 
i  some  one  with  a  load,  nor,  from  the  natiire  of  things,  can 
j  there  ever  be  such  a  tax.  It  is  the  more  necessary  to  insist 
I  upon  this  almost  self-evident  truth  because  certain  defi- 
nitions of  taxes  and  much  reasoning  about  taxation  be- 


*  Cf.  Ely,  Taxation  in  American  States  and  Cities,  p.  49  sq., 
for  the  former  view;  in  opposition.  Bastable,  Public  Finance, 
p.  244;  Plehn,  Introduction  to  Public  Finance,  p.  276.  In  the 
English  financial  year  180.3-4.  of  all  receipts  only  6  per  cent,  came 
from  quasi-economic  sources.  In  local  fi'Tance  the  proportion 
was  about  5  to  r  in  favor  of  taxes.  Even  in  Prussia,  where  the 
quasi-economic  receipts  yield  64  per  cent,  of  the  gross  revenue, 
they  yield  only  20  per  cent,  of  the  net  revenue. 

'The  only  exception  that  is  likely  to  be  taken  to  this  defi- 
nition will  come  from  those  who  believe  with  the  State  So- 
cialists, or  with  the  Collectivists,  that  taxation  has  a  double 
end  and  includes  both  the  support  of  the  state  and  the  redis- 
tribution (in  whole  or  part)  of  wealth.  Cf.  Wagner,  Finanz- 
wissenschaft,  II.,  p.  210  sq. 

*  Civil  Government,  p.  3  sq. 


56  TAXATION:   ITS   ESSENTIAL   NATURE. 

fog  this  indisputable  fact.]  So  eminent  a  jurist  as  Judge 
Cooley  ^  is  misleading  in  this  respect  when  he  defines 
taxes  as  a  "  contribution  of  persons  or  property  .  .  . 
for  the  support  of  government  and  for  all  public  needs." 
Property  is  always  the  property  of  some  person  or  per- 
sons, and  consequently  when  private  property  is  taken 
by  taxation  the  former  owner  suffers  the  loss.  Put- 
ting this  into  the  technical  language  of  finance,  we 
may  say  the  "  subject,"  or  the  bearer  of  taxes,  is  always 
a  person.  On  the  other  hand,  the  bases  on  which  taxes 
are  levied  are  numerous.  In  this  sense  it  is  true  that 
persons  or  property  may  contribute  to  the  support  of 
the  state;  that  is,  taxes  may  be  levied  upon  individuals 
as  such,  or  upon  property  as  such,  without  regard 
to  its  ownership.  The  basis,  whatever  it  be,  on  which 
taxes  are  levied  is  technically  called  the  "object" 
of  taxation.2  But  it  must  always  be  remembered  that 
when  property  or  capital  or  income  is  said  to  pay  taxes, 
the  immediate  reference  is  to  the  basis  upon  which  the 
tax  is  levied,  rather  than  to  the  bearer  of  the  weight  of 
taxation. 

/  To  understand  the  true  inwardness  of  taxation  we 
must  regard  taxes  from  the  standpoint  of  the  taxpayer 
both  as  an  isolated  individual  and  as  a  member  of  society. 
Viewed  from  the  first  point,  taxation  is  the  abstraction  of 
a  certain  amount  of  private  property  from  the  taxpayer's 
control.  Taxes  are  thus  regarded  by  him  as  a  cost  or 
expense,  an  evil  "  in  the  sense  that  every  sacrifice  is 
such."     But  this  is  only  one  side  of  the  case.     The  tax- 


^  The  Law  of  Taxation,  p.  4. 

*  It  is  to  be  noticed  tliat  "  object "  as  here  used  has  no 
reference  to  the  end  or  purpose  towards  which  taxation  is 
directed.  When  the  "  object "  of  taxation  is  rubricised  under 
an  economic  concept,  we  call  the  object  the  "source"  of  tax- 
ation;  e.g.  capital  is  a  "  source  "  of  taxation. 


NATURE  OF   TAXES.  57 

payer's  loss  is  not  an  absolute  loss,  such  as  one  incurred 
by  bad  debts,  or  by  fire  without  insurance.  As  a  return 
for  the  property  surrendered  in  taxes  the  taxpayer  as  a  / 
citizen  gets  a  share  in  the  benefits  of  government.  Con- , 
sidered  from  both  standpoints,  taxation  may  be  regarded . 
as  an  enforced  surrender  of  private  property  by  the  tax- 
payer for  an  undivided  interest  in  government  property 
and  services.  The  true  inwardness  of  normal  taxation 
then  is  this, — not  that  the  taxpayer  gets  nothing  for 
what  he  pays  out  in  taxes,  but  that  what  he  gets  and 
what  he  pays  for  what  he  gets,  are  immediately 
determined,  not  by  himself,  but  by  a  political  su- 
perior. The  social  standpoint  here  practically  coin- 
cides with  the  individual  standpoint.  When  society  surr 
renders  a  part  of  its  means  by  taxation  it  is  using  its 
resources  in  a  particular  way  which  the  government  pre- 
scribes. 

Every  cost,  whether  incurred  by  the  individual 
on  his  own  account,  or  imposed  by  society  at  large 
through  taxation,  aims  at  the  attainment  of  some  sup- 
posedly desirable  end.  The  end  towards  which  taxation 
looks  is  the  maintenance  of  the  government.  The  state's 
activities  are  normally  presumed  to  be  beneficent. 
Viewed  in  this  light  taxes  are  essentially  a  collective 
payment  for  public  services.  This  conception  of  taxa- 
tion carries  with  it  the  doctrine  of  the  proper  limits  of 
taxation.  Like  any  other  expenditure,  public  or  private, 
taxation  should  stop  where  additional  public  outlay  does 
not  secure  corresponding  advantages,  or  where  leaving 
property  in  the  hands  of  the  taxpayer  would  secure 
greater  advantages  to  society  at  large  than  collecting 
such  property  by  taxation  and  disposing  of  it  for  public 
purposes.  Theoretically,  therefore,  taxes  may  be  too 
low  as  well  as  too  high.     Experience  and  observation, 


is  TyfX/fTION:  ITS  ESSENTIAL  N/1TURE. 

however,  show  the  danger  of  too  low  taxes  to  be  largely 
imaginary,  J 

Much  ingenuity  has  been  wasted  in  trying  to  prove 
that  it  is  always  advantageous  that  taxes  be  paid  out  of 
incotne  rather  than  out  of  capital.  This  theory,  in  the 
first  place,  falsely  suggests  that  income  and  capital  are 
distinct  and  mutually  exclusive  things,  whereas  they  are 
rrierely  distinct  modes  of  measuring  the  same  thing — to 
wit,  wealth.  Not  only  are  the  implications  of  this  thcijry 
misleading,  but  its  assertions  are  false.  When  tax- 
payers actually  pay  taxes  out  of  their  incomes  they  cur- 
tail their  current  private  expenditures;  when  they  ac- 
tually pay  taxes  out  of  their  capital  they  simply  lessen 
the  amount  of  property  they  had  previously  amassed. 
There  is  no  particular  reason  for  thinking  that  the  former 
course  is  universally  to  be  preferred.  When  it  comes 
to  a  concrete  choice  between  curtailing  current  expendi- 
ture and  trenching  upon  "  a  sacred  mass  of  matter,"  it 
may  be  wise  to  do  the  latter,  just  as.  untler  the  stress 
of  circumstances,  it  may  be  necessary  to  do  both. 
Legislation,  moreover,  must  obviously  be  impotent  to 
prescribe  which  course  the  individual  taxpayer  shall  pur- 
sue. This  ideal  rule  of  taxation,  therefore,  proves  upon 
examination  to  be  not  always  desirable  if  possible,  and 
not  always  possible  if  desirable. 

Much  fruitless  controversy  also  has  waged  around  the 
proposition  that  net  income  is  the  oidy  possible,  or  at 
least  the  only  permanent,  source  of  taxation.  If  this 
statement  means  that  taxes  which  not  only  lessen  cur- 
rent expenditure,  but  yearly  trench  upon  and  diminish 
private  capital,  will  ultimately  exhaust  this  capital  and  so 
cannot  last  forever,  it  is  obviously  true.  But  if  the  state- 
ment mean,  what  it  is  frequently  interpreted  to  mean, 
that  taxes  are  a  junior  lien  on  public  income,  and  cannot 


FALL/tCIES  CONCERNING   TAXATION.  59 

be  paid  until  the  ordinary  commercial  expenses  of  pro- 
duction are  first  met,  it  is  demonstrably  false.  This 
latter  position  has  been  arrived  at  from  considerations 
such  as  these :  no  individual  citizen,  it  is  argued,  can 
pay  taxes  unless  he  have  some  income  over  a  bare  sub- 
sistence :  but  what  is  true  of  one  citizen  is  true  of  all 
citizens :  hence  the  only  source  of  taxation  in  general 
is  the  sum  of  net  incomes,  or,  what  comes  to  the  same 
thing  practically,!  the  only  source  of  taxation  is  the  net 
national  income. 

The  fallacy  in  this  argument  consists  in  the  assump- 
tion that  there  must  be  something  in  society  correspond- 
ing to  what  exists  in  each  unit  of  society.  Similarly  we 
might  argue :  scarcity  of  corn  is  good  for  the  farmer 
because  it  brings  him  good  prices  :  but  practically  every- 
body produces  something:  hence  a  scarcity  of  every 
product  would  be  good  for  society  generally.  Tacitus 
speaks  of  those  who  create  a  wilderness  and  call  it  peace; 
this  plan  would  create  a  famine  and  call  it  prosperity. 
Evidently  there  are  certain  functions  performed  by  gov- 
ernment, such  as  the  protection  of  life  and  property, 
which  precondition  all  industrial  effort.  Taxes  which 
secure  these  services  must  be  regarded  as  among  the 
necessary  and  fundamental  costs  of  society's  industrial 
efforts.  They  must  be  paid  even  if  the  net  national  in- 
come for  the  time  being  is  turned  into  a  negative  quan- 
tity, and  even  though  the  national  capital  be  thereby 
impaired. 

Fallacies  concerning  Taxation.  —  If  the  nature  of 
taxation  has  been  properly  apprehended  as  a  devotion 
of  a  part  of  society's  aggregate  wealth  to  public  ends, 

*  Cf.  Roscher,  System  der  Finanzwissenschaft,  35,  p.  158. 
"Wir  miissen  praktisch  als  Quelle  der  Steuern  das  Rcineinkom- 
men  der  Pflichtigen  bezeichnen." 


6o  TAXATION:  ITS  ESSENTIAL   NATURE. 

and  justifiable  only  so  far  as  the  social  benefits  of  gov- 
ernment expenditure  exceed  those  of  private  use,  the 
fallacies  in  which  taxation  is  sometimes  involved  will 
be  readily  perceived.  Most  of  these  fallacies  result  from 
ignorance  of  fundamental  economic  principles.  An  es- 
pecially fertile  source  of  error  is  the  delusion  that  the 
state  somehow  has  creative  power  in  the  domain  of  pro- 
duction. This  is  the  so-called  "  magic-fund  delusion." 
It  finds  expression,  for  example,  in  the  assertion  that 
though  taxation  in  general  be  an  evil  or  a  cost,  yet  it  is 
an  advantage  to  those  who  sell  their  goods  to  the  state 
or  who  receive  their  salaries  from  the  state.  This  in 
one  sense  is  true  enough,  but  the  implication  is  that 
these  goods  sold  and  services  rendered  to  the  state  are 
over  and  above  what  would  be  economically  in  demand 
were  the  state's  demand  for  goods  and  services  to  be  re- 
duced. The  positive  form  of  this  delusion  is  the  argu- 
ment for  the  public  employment  of  the  unemployed,  not 
as  an  occasional  act  of  necessary  charity,  but  on  the 
ground  that  such  employment  "  makes  work." 

In  confutation  of  this  error,  it  may  be  said  that  those 
who  sell  goods  or  who  render  services  to  the  government 
are  not,  in  the  long  run  and  apart  from  temporary  condi- 
tions, specially  benefited  by  being  paid  out  of  the  proceeds 
of  taxation,  unless  indeed  they  thus  get  for  their  goods  or 
services  more  than  they  could  otherwise  get  for  them  in 
the  open  market.  Such  persons  derive  their  incomes  in 
substantially  the  same  way  as  other  persons  do,  by  pro- 
ducing useful  commodities  or  rendering  useful  services 
for  which  they  happen  to  be  paid  out  of  tn\-e'=  instead  of 
being  directly  paid  by  their  fellows.  Should  the  govern- 
ment take  less  by  way  of  taxation  and  spend  less  for 
goods  or  services,  the  greater  amount  left  in  the  hands 
of  the  community  would  constitute  a  fund  out  of  which 


FALLACIES  CONCERNING   TAXATION.  61 

ultimately   these  former   recipients  of  taxes   would  be 
paid. 

Those  who  liold  the  idea,  therefore,  that  they  who 
live  on  the  proceeds  of  taxation  somehow  transform  the 
payment  of  taxes  from  a  total  to  a  partial  loss,  miscon- 
ceive not  only  the  true  nature  of  taxation,  which  is  a 
sacrifice  incurred  to  secure  a  desirable  end,  and  which 
is  none  the  less  a  sacrifice  because  the  end  involves  the 
purchase  of  particular  goods  or  services,  but  they  also 
labor  under  the  delusion  that  public  expenditure  actually 
creates  for  goods  and  services  a  demand  which  other- 
wise would  never  exist.  This  is  really  "  the  great  politi- 
cal superstition  " — that  the  state  is  not  subject  to  the 
general  law,  ex  nihilo  nihil  fit.  Similarly  it  must  be  clear 
that  if  more  property  than  usual  be  taken  by  taxation 
and  spent  by  the  state  on  labor  or  goods,  less  will  re- 
main in  the  hands  of  the  community  with  which  to  pay 
wages  or  to  buy  commodities  on  private  account.  These 
general  truths  must  be  qualified,  of  course,  as  to  the 
rapidity  of  their  operation.  The  condition  of  industry, 
the  difficulty  of  efTecting  industrial  changes,  and  the 
private  losses  arising  from  the  inability  of  specialized 
ability  or  specialized  capital  immediately  to  obtain 
equally  remunerative  re-employment,  must  all  be  taken 
into  account.  But  these  are  secondary  details  after  all, 
necessary  to  correct  the  underlying  truth,  but  not  able  to 
obscure  or  to  change  it.  Perhaps  the  best  exemplifi- 
cation of  the  ease  with  which  in  prosperous  times  vast 
transitions  may  be  readily  accomplished  is  seen  in  the 
sudden  cessation  in  the  government  demand  for  services 
and  commodities  at  the  end  of  the  late  civil  war,  and 
the  almost  immediate  and  equal  increase  in  the  private 
demand  for  services  and  goods  which  happily  had  become 
available  for  purposes  of  peaceful  mdustry.     The  die- 


62  TAXATION :  ITS  ESSENTIAL  NATURE. 

turn  that  "  every  new  tax  creates  a  new  ability  in  the  sub- 
ject to  bear  it  "  is  distinctly  limited  by  Hume  as  operative 
only  within  "certain  bounds."  It  may  perhaps  be  true  that 
taxes  which  threaten  the  very  existence  of  large  classes 
might  increase  their  industrial  efforts.^  Normally,  how- 
ever, the  greatest  stimulus  to  increased  production  is 
the  assurance  of  freely  enjoying  what  has  been  produced. 
We  cannot  too  thoroughly  emphasize  the  general  truth 
that  "  the  greatest  promoter  of  industry  is  security  "  ^ — 
the  assurance  that  "  whatsoever  a  man  soweth,  that  shall 
he  also  reap,"  without  extortionate  interference  on  the 
part  of  his  neighbors  or  on  the  part  of  his  greater  neigh- 
bor, the  state. 

*Just  as  a  fall  in  the  rate  of  interest  niay  stimulate  the  frugal 
to  greater  frugality. 

*  Bastable,  Public  Finance,  p.  271  s^. 


CHAPTER   II. 

TAXATION  :     ITS    REAL   AND    APPARENT   BURDEN. 

The  Incidence  of  Taxation. — The  payment  of  taxes, 
involving  as  it  does  a  diminution  of  such  wealth  as  is 
individually  disposable,  is  commonly  recognized  as  a 
cost,  a  sacrifice,  an  expense.  Yet  certain  facts  might 
seem  at  first  hard  to  reconcile  with  this  general  truth. 
For  example,  it  must  seem  paradoxical  at  first  sight  that 
some  who  pay  money  into  the  hands  of  the  tax-collector 
should  be  found  protesting  against  the  abolition  of.  the 
very  laws  which  require  of  them  such  payments.  At 
times  persons  are  even  found  agitating  for  an  actual 
increase  in  the  amount  of  taxation  imposed  upon  objects 
which  they  themselves  produce.  Thus  after  our  civil 
war  the  match  manufacturers  decried  the  proposed 
abolition  of  the  tax  on  matches.^  The  manufacturers 
of  whiskey  in  the  United  States  have  been  notoriously 
active  at  different  times  to  persuade  Congress  to  advance 
the  tax  on  their  product.^ 

It  needs  but  the  slightest  reflection  to  convince  us  that 
these  demands  are  not  prompted  by  public  spirit.  It  is 
not  benevolence  but  self-interest  w^hich  they  all  betoken. 

'  See  Seligman,   Shifting  and  Incidence,  p.   159  sq. 

'  Mr.  Thomas  G.  Shearman  in  his  recent  monograph  on 
Natural  Taxation  charges  the  Whiskey  Trust  with  expending 
over  a  million  dollars  to  induce  Congress  to  exempt  stocks  of 
whiskey  on  hand  when  the  tax  on  whiskey  was  advanced  in 
1894. 

63 


64      TAXATION :  ITS  REAL   AND  APPARENT  BURDEN. 

The  immediate  reason  for  this  apparent  wilHngness  on 
the  part  of  such  producers  to  pay  taxes  is  the  beUef  that 
what  they  thus  pay  out  will  be  recouped,  perhaps  with  an 
additional  profit,  from  the  purchasers,  who  are  expected 
thereafter  to  pay  for  the  taxed  article  a  higher  price.  The 
new  price  is  commonly  greater  than  the  old  price,  and 
consequently  a  stock  of  goods  on  hand  not  subject  to  the 
increased  rate  of  taxation  is  enhanced  in  market  value 
by  the  newly  imposed  tax.  The  apparent  taxpayer,  the 
one  who  actually  does  advance  money  to  the  public  fisc, 
is  by  no  means  always  the  real  bearer  of  the  burden. 
In  the  last  resort  the  tax  may  be  paid  by  one  upon  whom 
the  tax  is  shifted  through  some  process  of  sale  or  ex- 
change. Taxes  are  often  concealed  in  the  prices  asked 
for  articles,  and  thus  a  storekeeper,  as  Mr.  Wells  says, 
frequently  keeps  on  hand  in  the  prices  he  asks  for  his 
goods  "  a  lot  of  assorted  taxes." 

From  this  preliminary  statement  it  becomes  tolerably 
evident  that  the  burden  of  taxation  need  not  necessarily 
rest  upon  those  who  in  the  first  instance  advance 
money  to  the  public  treasury.  We  must  distinguish  the 
nominal  payer,  who  advances  the  money  for  taxes,  from 
the  real  payer,  who  actually  bears  the  tax  burden.  And 
inasmuch  as  an  ideal  system  of  taxation  must  have  re- 
gard to  the  way  in  which  various  social  classes  are 
aflfected  by  taxation,  it  becomes  imperative  to  study  the 
final  location  or  "  incidence  "  of  taxes,  as  well  as  the 
process  of  "  shifting  "  by  means  of  which  the  burden  is 
sometimes,  in  subtle  ways,  transferred  from  one  person 
to  another. 

The  Concentration  Theories  of  Incidence. — Most  ex- 
planations of  this  process  of  the  shifting  of  taxes  may  be 
grouped  about  one  or  the  other  of  two  opposing  princi- 
ples.   First,  there  are  those  who  have  maintained  that  the 


THE  CONCENTRATION   THEORIES   OF  INCIDENCE.     65 

whole  burden  of  taxation  is  shifted  upon  some  particular 
class  in  the  community.  Second,  there  are  those  who  hold 
that  taxes  are  borne  alike  by  all  classes,  by  everybody  in 
general  and  by  nobody  in  particular.  This  last  doctrine 
has  been  called  the  Diffusion  Theory ;  and  by  contrast 
we  might  call  the  other  the  Concentration  Theory. 
The  adherents  of  the  Concentration  Theory  have  by  no 
means  agreed  as  to  the  class  that  was  so  singularly  vexed 
by  taxes.  John  Locke,  for  example,  held  that  "  taxes, 
however  contrived,  and  out  of  whose  hands  soever  im- 
mediately taken,  do,  in  a  country  where  the  great  fund 
is  in  land,  for  the  most  part  terminate  on  land."  ^  The 
proof  offered  in  support  of  this  contention  was  simple. 
The  laborer  cannot  bear  taxes,  for  he  lives  now  but  from 
hand  to  mouth.  The  trading  part  of  the  community 
will  shift  taxes  imposed  on  them  by  advancing  their 
prices,  and  as  there  is  no  one  else  to  bear  taxes  but  the 
landlord,  on  the  landlord  must  the  taxes  finally  fall. 
There  seemed  to  be  a  very  general  agreement  for  a  time 
upon  the  comparative  readiness  of  landowners  to  bear 
the  brunt  of  taxation.  Walpole,  for  example,  is  on 
record  as  saying  that  "  landed  gentlemen  are  like  the 
flocks  upon  their  plains  who  suffer  themselves  to  be 
shorn  without  resistance;  whereas  the  trading  part  of 
the  nation  resemble  the  boar  who  will  not  suffer  a  bristle 
to  be  plucked  from  his  back  without  making  the  whole 
parish  to  echo  with  his  complaints."  ^ 

This  doctrine  of  Locke's  that  the  landowner  was  the 
sole  supporter  of  taxation  was  virtually  reaffirmed  by 
the  Physiocrats,  and  with  certain  exceptions  by  Adam 
Smith,  although  he  used  a  somewhat  different  line  of 

*  Some  Considerations  on  the  Consequences  of  Lowering  the 
Interest  and  Raising  the  Value  of  Coin,  1691. 

'  Cf.  Sinclair,  History  of  the  Public  Revenue,  Vol,  III., 
Appendix,  p.  79. 


66      TAXATION:  ITS  REAL  AND   APPARENT  BURDEN. 

argument.  The  vexed  question  was  taken  up  later  by 
Ricardo,  whose  method  and  some  of  whose  conclusions  in 
this  matter  still  command  general  assent.  He  inclined,  how- 
ever, to  the  belief  that  the  profit-recipient,  the  manufac- 
turer and  the  merchant,  were  the  great  sufferers  by  taxa- 
tion. Smith  is  "  the  advocate  of  the  landed  interest," 
Ricardo  "  of  the  moneyed  interest."  ^  The  Concentra- 
tion Theories  are  universally  regarded  to-day  as  one- 
sided, though  frequently  their  defect  consists  in  the  nar- 
row and  rigid  assumptions  on  which  they  are  based 
rather  than  in  defective  reasoning  in  exploiting  their 
logical  implications.  Their  comparative  validity  will  be 
involved  in  the  formulation  of  the  definitive  theory  of 
incidence  and  need  not  detain  us  here. 

The  Diffusion  Theory  of  Incidence. — This  theory  as- 
serts that,  irrespective  of  the  payment  of  taxes  in  the 
first  instance,  all  economic  classes  alike  are  finally  made 
to  share  the  burden  of  taxes,  and  that,  too,  in  some  fair 
proportion  to  their  respective  ability.  "  Taxes,"  says  Mr. 
Wells,2  "  equate  and  diffuse  themselves,  and  if  levied  with 
certainty  and  uniformity,  they  will,  by  diffusion  and  reper- 
cussion, reach  and  burden  all  property  with  unerring 
certainty  and  equality."  The  Diffusion  Theory  owes  its 
name  to  Thiers,  the  French  statesman,  who  compared 
this  supposed  propagation  of  the  burden  of  taxation 
throughout  the  industrial  structure  to  the  analogous 
optical  phenomenon  of  the  diffusion  of  light.  Tlic 
theory  owes  its  first  vivid  statement  to  Lord  Mansfield, 
who  in  1766,  in  a  speech  upon  taxing  the  American 
colonies,  remarked:  "  I  hold  it  to  be  true  that  a  tax  laid 
in  any  place  is  like  a  pebble  falling  into  and  making  a 

*  Seligman,  Shifting  and  Incidence  of  Taxation,  p.  120.  This 
study  of  tlie  subject  is  valuable  on  both  its  historical  and  its 
theoretical  side. 

'■'  Lalor's  Encyclopedia,  article  on  Taxation, 


THE  DIFFUSION   THEORY  OF  INCIDENCE.  67 

circle  in  a  lake,  till  one  circle  produces  and  gives  mo- 
tion to  another,  and  the  whole  circumference  is  agitated 
from  the  centre."  This  idea  of  the  diffusion  of  taxes 
was  systematically  developed  by  Canard,  a  French 
economist,  in  a  work  published  about  the  beginning  of 
the  present  century. ^  He  compares  taxation  to  the  cup- 
ping of  a  vein.  This  process  causes  no  particular  dearth 
of  blood  in  the  particular  vein  tapped,  inasmuch  as  the 
adjoining  veins  contribute  to  make  good  the  loss. 
Courcelle-Seneuil  similarly  likens  taxation  to  the  influ- 
ence of  the  climate  or  the  rain  which  falls  alike  upon  t'.:e 
just  and  the  unjust. 

Some  one  has  said  that  it  is  a  merit  of  the  jests  of 
Erasmus  that  they  can  all  be  translated  into  arguments. 
Many  will  doubtless  feel  that  it  is  a  defect  common  to  the 
arguments  for  the  equitable  and  automatic  diffusion  of 
taxation  that  they  may  all  be  translated  into  jests.  This 
whole  theory  rests  either  upon  unproved  assumptions  or 
misleading  analogies.  A  candle  in  a  dark  room  does  not 
equally  illumine  all  parts  of  the  room,  however  diffused 
the  candle's  light.  The  centre  of  a  pond  is  more  vio- 
lently agitated  by  a  pebble  flung  therein  than  are  the 
more  distant  parts  of  the  pond's  surface.  It  is  not  al- 
together a  matter  of  indifference  what  vein  is  opened 
in  the  process  of  cupping.  But  enough  of  these  analo- 
gies. Indeed  the  only  really  serious  attempt  to  demon- 
strate the  theory  of  diffusion  was  made  by  Canard.  He 
asserts  that  every  tax  laid  upon  any  particular  object 
will  be  borne  in  part  by  the  producer  and  in  part  by  the 
purchaser.  Thus,  finally,  the  burden  will  be  fairly  ap- 
portioned between  these  two  typical  social  classes,  and 
hence  throughout  society  at  large. 

^Principes   d' Economic   Politique. 


68     TytXATlON:  ITS  REAL  AND  APPARENT  BURDEN. 

The  Diffusion  Theory,  if  accepted,  very  naturally  leads 
to  optimism  in  the  matter  of  taxation,  assuming  as  it  does 
an  automatic  tendency  in  taxes  towards  perfect  adjust- 
ment, provided  only  that  time  be  allowed  for  this  process 
to  work  itself  out.  As  a  corollary  it  follows  that  old 
taxes,  like  old  wine,  are  better  than  new.  They  have 
equated  and  adjusted  themselves. 

Perhaps  the  readiest  refutation  of  this  theory  and  its 
implicates  is  to  show  that  one  important  class  of  taxes  is 
never  shifted  at  all.  Take  the  case  of  production  under 
monopoly  conditions.  Suppose  A.  B.  has  a  copyright 
upon  a  book  for  which  there  is  a  large  demand.  The  book 
is  put  upon  the  market  at  a  price  fixed  not  merely  to  afford 
a  margin  over  the  expenses  of  publication,  but  so  as  to 
yield  the  greatest  net  return.  Not  uncommonly  this  price 
will  be  the  only  price  which  will  yield  the  maximum  net 
profit.  A  higher  price  will  diminish  sales,  and  thus  cut 
down  the  net  gain.  A  lower  price  will  increase  the 
sales,  but  not  sufficiently  to  cover  the  increased  expenses 
involved  in  the  larger  outpuL  If  in  this  case  or  in 
all  similar  cases  a  moderate  tax,  based  upon  a  certain 
percentage  of  the  net  profits,  be  imposed,  such  a  tax 
cannot  be  shifted  in  whole  or  in  part.  To  advance  the 
price  or  to  lower  the  price  are  both  alike  economically 
impossible.  The  result  is  that  the  tax  diminishes  the 
monopoly  profits  and  produces  no  other  effects.  The 
field  of  monopoly  production  in  the  world  of  to-day  is 
already  large  and  is  rapidly  growing.  A  theory  of  taxa- 
tion, therefore,  which  is  wholly  inapplicable  to  so  im- 
portant an  economic  domain  can  hardly  be  an  adequate 
explanation  of  incidence.  The  same  truth — that  certain 
taxes  are  not  shifted — might  be  abundantly  proved  from 
economic  history.  But  there  is  hardly  need  of  addi- 
tional evidence  to  dissipate  the  easy-going  optimism  of 


THE  DEFINITIVE   THEORY  OF  INCIDENCE.  69 

the  Diffusion  Theory.  As  Roscher  ^  wisely  says :  "  A 
state  which  lays  vicious  taxes  and  trusts  to  the  remedial 
power  of  shifting  takes  a  leap  into  the  dark." 

The  Definitive  Theory  of  Incidence.  —  Probably  the 
readiest  way  to  cut  to  the  heart  of  the  current  theory  of 
the  incidence  of  taxes  is  to  take  up  the  discussion  of 
the  simple  case  of  a  tax  imposed  upon  the  manufac- 
turers of  some  particular  commodity.  Let  us  assume 
then  that  the  distillers  of  whiskey  are  required  to  pay  a 
tax  of  fixed  amount  upon  every  gallon  of  whiskey  they 
make.  We  may  assume  also  for  the  sake  of  the  argu- 
ment that  all  whiskey  is  of  one  uniform  grade  and  has 
been  untaxed  hitherto.  Now  it  may  chance  that  whis- 
key is  produced  under  (a)  competitive  conditions,  or 
under  (b)  monopoly  conditions.  By  the  first  we  mean 
that  the  selling  price  of  whiskey  is  normally  determined 
by  the  expenses  of  producing  whiskey.  There  may  be 
different  expenses  of  production,  according  as  superior 
skill  or  better  machinery  or  more  advantageous  location 
is  utilized.  But  in  the  long  rvm  the  selling  price  must 
cover  the  expenses  of  those  distillers  who  produce  at  the 
greatest  expense  per  gallon.  Unless  their  sales  yield 
them  a  living  as  good  as  similar  energy  would  yield  in 
other  lines  they  will  abandon  the  distilling  business.  In 
case  their  sales  do  not  cover  their  expenses  they  will  fail 
and  will  be  forced  out  of  the  business.  By  monopoly 
conditions,  on  the  other  hand,  we  imply  that  the  selling 
price  is  determined,  not  by  the  maximum  expenses  of 
production,  but  is  set  at  such  a  figure  that  the  sales  at 
the  price  fixed  will  yield  the  greatest  net  profit. 

First,  let  us  consider  the  case  of  competition.  If  a  tax 
of  a  dollar  a  gallon  were  suddenly  imposed  upon  the 

*  Finanzwissenschaft,  p.  182. 


7©      TAXATION :   ITS   REAL   AND    APPARENT  BURDEN. 

whiskey  distillers,  their  first  impulse  would  be  to  in- 
crease the  price  of  their  whiskey  to  the  buyer,  and  so  to 
saddle  him  with  the  tax.  However,  the  distillers  would  thus 
run  the  risk  of  finding-  their  sales  shrink.  Large  stocks 
would  probably  be  left  on  their  hands  unsold.  This  is 
but  the  exemplification  of  the  fundamental  law  that  price 
and  demand  vary  in  opposite  directions.  It  is  clear  also 
that  the  distillers'  ability  to  advance  their  prices  will 
depend  largely  upon  the  readiness  of  the  whiskey  buyers 
to  concede  the  increased  price;  or,  in  the  technical  lan- 
guage of  Economics,  the  producer's  ability  under  the 
given  circumstances  to  raise  the  market  price  wi:l  de- 
pend upon  the  elasticity  of  the  demand  for  the  article.^ 
In  a  community  of  confirmed  topers  perhaps  the  price 
could  be  increased  a  dollar  per  gallon — the  full  amount 
of  the  tax.  Indeed  the  history  of  the  internal  revenue  ^ 
during  our  civil  war  showed  pretty  conclusively  that, 
gauged  by  the  test  of  relinquishment,  the  consumers  of 
distilled  spirits  regard  their  liquor  pretty  much  in  the 
light  of  a  necessity.  In  the  degree,  then,  that  the  taxed 
article  is  regarded  as  a  necessity  for  which  there  is  no 
substitute  the  producers  will  be  able  to  shift  the  burden 
upon  the  consumer.  In  the  degree  that  purchasers  in- 
cline to  lessen  their  use  of  the  taxed  article  will  the 
producer  be  unable,  at  least  at  first,  to  shift  upon  con- 
sumers the  whole  burden  of  the  tax.  In  the  one  ex- 
treme ^  the  new  price  will  be  the  former  price  increased 
by  the  tax;  in  the  other  extreme  the  new  price  will  be 
for  a  time  the  same  as  the  former  price.  We  must  by 
no  means  overlook  certain  important  collateral  effects 
of  this  tax  we  have  supposed  to  be  levied  on  whiskey. 

'Cf.   Marshall,   Principles  of  Economics,   Bk.   III.,   Ch.   IV. 
*  Cf.  Wells,  Practical  Economics,  p.  i8i  sq. 
'  Assuming    the    cost    of    production    constant    per    unit    of 
product. 


THE  DEFINITIVE   THEORY  OF  INCIDENCE.  7^ 

Where  cthe  producer  is  able  to  shift  the  whole  burden 
upon  the  consumer  the  purchasers  of  whiskey  who  buy 
at  the  increased  price  will  have  a  smaller  portion  of  their 
income  than  formerly  to  exchange  for  other  goods. 
Their  demand  for  other  products  will  usually  fall  ofT, 
and  will  thus  injure,  at  least  temporarily,  other  lines  of 
productive  enterprise.  While  these  collateral  effects  are 
sure  to  follow,  it  is  difficult  to  predict  where  and  how  they 
will  occur.  But  we  have  a  clue  to  the  efifects  thus  dif- 
fused throughout  a  wide  circle  of  industries  when  we 
come  to  consider  the  collateral  efifects  produced,  when 
oiir  typical  producers,  the  whiskey  distillers,  are  unable 
to  advance  their  prices  by  the  full  amount  of  the  tax. 
Before  the  imposition  of  the  tax  the  price  received  for 
whiskey  just  afforded  a  living  to  those  producers  least 
advantageously  circumstanced.  The  new  price  is  now 
higher  than  the  old  price,  but  by  less  than  the  amount  of 
the  tax.  Consequently  those  distillers  who  were  just  on  the 
margin  of  profitable  production  will  find  that  their  sales 
no  longer  cover  their  expenses.  They  will  consequently 
be  forced  to  withdraw  from  the  business.  The  new 
price  ^  will  thereafter  just  remunerate  such  producers  as 
remain  on  the  margin  of  profitable  distilling.  The  tax 
has  become  a  veritable  portion  of  the  marginal  expenses 
of  production  which  thereafter  set  the  current  normal 
price  for  whiskey.     In  both  cases,  then,  when  the  pro- 


^  The  discussion  in  the  text  assumes  the  cost  of  production 
per  unit  to  be  constant.  More  exactly  we  may  say  that  when 
an  article  is  produced  subject  to  the  law  of  diminishing  returns. 
a  diminished  supply  will  be  forthcoming  at  a  lower  cost  per 
unit;  so  that  with  the  tax  added  the  new  price  will  exceed  the 
former  price  by  less  than  the  amount  of  the  tax.  Similarly,  if 
the  article  produced  obeyed  the  law  of  increasing  return;,  the 
new  price  would  exceed  the  former  price  by  more  than  the 
amount  of  the  tax.  On  this  point  see  SeJigman,  Shifting  and 
Incidence  of  Taxation,  p.  147  sq. 


72      TAXATION:  ITS  REAL  AND  APPARENT  BURDEN. 

ducers  shift  the  tax  without  lessening  the  output,  and 
when  they  shift  it,  after  having  lessened  their  output, 
the  tax  becomes  a  part  of  the  expenses  of  production  and 
must  ultimately  be  borne  by  the  consumer.^  The  evil  effect 
upon  other  industries  or  upon  the  former  marginal  pro- 
ducers of  whiskey  will  be  temporary,  though,  as  Mr. 
Cannan  ^  says,  "  '  temporary  '  depression  is  a  very  per- 
manent thing  to  those  who  are  crushed  out  of  a  trade  by 
it."  Nor  ought  we  to  overlook  such  unnoticed  collateral 
effects  as  result  from  the  decreased  use  of  the  taxed 
article  owing  to  its  increased  price.  Many  former  con- 
sumers must  curtail  their  consumption.  Some  must 
forego  it  altogether, — a  result  which  we  might  contem- 
plate with  complacency  as  regards  whiskey,  but  which 
is  just  as  liable  to  take  place  in  the  case  of  necessary  or 
useful  articles. 

Throughout  the  discussion  we  have  been  assuming  the 
existence  of  competitive  prices.  It  remains  to  speak  of  the 
incidence  of  taxes  imposed  on  articles  sold  at  monopoly 
prices.  If  a  tax  of  fixed  amount,  as  before  assumed,  be 
imposed  upon  each  unit  of  the  product,  the  monopoly 
producer  cannot  ordinarily  escape  the  pressure  of  taxa- 
tion altogether.  He  may  sometimes  minimize  his  loss,  and 
at  the  same  time  impose  on  the  consumer  a  heavy  share 
of  the  tax  load.  Let  us  suppose,  for  instance,  that  the 
manufacturers  of  a  caligraph,  protected  by  patents,  could 
market  yearly  10,000  instruments  at  70  dollars  apiece; 
20,000  instruments  at  60  dollars  apiece; 
30,000  instruments  at  50  dollars  apiece. 

*TTie  careful  formulation  of  the  theory  of  incidence  shows 
that  such  assertions  as  "the  consumer  always  pays  the  tax"  or 
(as  regards  taxed  imports)  "  the  foreigner  pays  the  tax "  are 
fallacious  when  unqualified,  the  latter  indeed  more  frequently 
than  the  former. 

'  Elementary  Political  Economy,  p.  147. 


THE  DEFlNlTiyE   THEORY  OF  INCIDENCE.  73 

We  may  assume  also  that  certain  economies  in  pro- 
duction could  be  employed  so  that  the  expenses  of 
production  per  machine  would  be  less,  the  greater  the 
total  output.  Let  us  assume  that  the  plant  could  turn 
out  10,000  machines  at  a  cost  of  35  dollars  per  machine; 
20,000  machines  at  a  cost  of  30  dollars  per  machine; 
30,000  machines  at  a  cost  of  28  dollars  per  machine. 
Under  these  assumed  conditions  we  shall  have  the  fol- 
lowing results: 

Output.  Gross  Receipts  Expenses  of  Production.  Net  Profits. 

(A)  10,000  at  $70  $700,000              $350,000  $350,000 

(B)  20,000  at  $60  $1,200,000               $600,000  $600,000 

(C)  30,000  at  $50  $1,500,000               $840,000  $660,000 

Under  these  conditions  the  lowest  of  the  three  prices, 
namely  $50  per  machine,  will  give  the  monopoly  pro- 
ducer the  greatest  net  profit.  But  suppose  a  tax  of  $10 
per  machine  be  imposed  on  the  producer,  then  we  shall 
have  the  following  results: 

Output.  Gross  Receipts.  Expenses  of  Production.  Net  Profits. 

(A)  10,000  $700,000  $450,000  ($45  each)  $250,000 

(B)  20,000  $1,200,000  $800,000  ($40  each)  $400,000 

(C)  30,000  $1,500,000  $1,140,000  ($38  each)  $360,000 

Under  the  new  conditions  the  highest  net  profit  will  be 
had  when  the  output  is  reduced  from  30,000  to  20,000 
(case  B).  The  tax  will  have  the  effect  of  reducing  the 
profits  of  the  producers,  but  at  the  same  time  the  pur- 
chasers of  the  machine  will  sufifer,  first,  in  that  the  num- 
ber of  would-be  purchasers  is  cut  down  from  30,000  to 
20,000;  and  second,  in  that  each  purchaser  hereafter 
will  have  to  pay  $60  for  each  instrument  instead  of  $50 
as  heretofore.  Unlike  the  effect  of  mercy,  the  tax  in- 
jures "  him  that  gives  and  him  that  takes," 

Suppose,  on  the  other  hand,  that  the  monopoly  pro- 


74     TAXATION :  ITS  REAL   AND  APPARENT  BURDEN- 

ducers  were  taxed  ten  per  cent,  of  their  net  profits,  then 
we  should  find  the  case  to  stand  thus: 

Net  Profits  as  before  the  Tax.  Diminished  by  the  Tax. 

(A)  $350,000  $315,000 

(B)  $600,000  $540,000 

(C)  $660,000  $594,000 

Hence  the  maximum  net  profit  would  be  obtained  by 
maintaining  the  largest  output  and  the  corresponding 
(lowest)  selling  price.  The  consumer  would  not  be  in 
the  least  afTected,  and  the  monopoly  producer  would 
bear  the  tax  in  its  entirety.^ 

We  conclude,  therefore,  that  a  tax  upon  each  unit  of 
an  article  produced  under  monopoly  conditions  may  be 
borne  in  part  by  the  purchaser,  and  that  there  is  no  assur- 
ance that  the  monopolist  will  bear  the  entire  tax,  unless 
the  tax  is  levied  upon  the  net  profits,  or  in  such  fashion  as 
to  preclude  the  curtailment  of  the  supply. 

From  this  preliminary  study  of  both  competitive  and 
monopoly  production  we  may  draw  the  following  gen- 
eral conclusion:  The  shifting  of  a  tax  by  the  producer  upon 
the  consumer  depends  on  the  possibility  of  the  producer's 
restricting  the  supply  of  the  commodity  or  service  upon 
zvhich  the  tax  is  levied?     The  hindrances  to  restricting 


^  Practically  the  same  effect  would  follow  were  a  percentage 
tax  levied  on  the  monopoly's  gross  receipts,  provided,  of 
course,  that  the  tax  be  not  so  excessive  as  to  reduce  the  net 
profits  below  the  level  of  profit  in  competitive  undertakings, 
in  which  cas-  some  of  the  capital  might  be  withdrawn  from  the 
enterprise.  Mr.  Ralph  W.  Cone  has  called  my  attention  to  the 
fact  that  for  a  tax  of  less  than  $6  the  producer  would  bear  the 
entire  burden. 

^  "  L'inipot  reste  a.  la  charge  de  celui  qui  le  paye,  si  I'objet  sur 
le;.quel  il  est  assis  n'est  pas  susceptible  de  restriction.  II  est 
rejete  en  lout  ou  en  partie  sur  d'autres  contribuablcs,  si  I'objet 
est  susceptible  de  restriction." — de  Parieu,  quoted  by  Roscher, 
Finanzwissenschaft,  p.  179.  See  also  Wagner,  Finanzwissen- 
schaft,  II.,  p.  353  sq.,  for  a  fuller  statement. 


j4ppucation  to  various  classes  of  income.   75 

the  supply  may  be  physical  hindrances.  Thus  the  sup- 
ply of  land  in  the  heart  of  a  city  cannot  be  re- 
stricted.^ Sometimes  the  hindrance  is  economic  in  its 
nature.  Thus  a  tax  imposed  upon  the  profits  of  a 
monopoly  product  (such  as  the  caligraph  just  men- 
tioned) cannot  be  evaded  by  a  restriction  of  the  supply, 
inasmuch  as  a  diminished  output  would  result  in  a 
greater  loss  to  the  producer  than  is  occasioned  when  the 
producer  bears  the  entire  tax. 

Application  to  Various  Classes  of  Income.  —  If  all 
taxes  were  levied  upon  the  producers  of  manufactured 
goods,  the  problem  of  the  incidence  of  taxation  would 
be  comparatively  simple.  We  should  obviously  require 
to  know,  first  of  all,  what  goods  various  individuals  or 
social  classes  consumed.  We  should  next  inquire  which 
of  these  goods  were  manufactured  under  competitive 
conditions  and  which  under  monopoly  conditions. 
Finally,  we  should  have  to  satisfy  ourselves  whether 
there  were  in  force  any  special  circumstances  which 
would  tend  to  modify  the  general  rule  as  to  the  shifting 
of  taxes.  If  there  were  no  such  disturbing  elements  to 
be  allowed  for,  we  could  pronounce  with  some  certainty 
an  opinion  as  to  the  location  and  the  weight  of  the  tax 
burden  as  between  producers  and  consumers.  Even 
here  we  ought  to  remember  that  each  individual  is  or- 
dinarily both  a  consumer  and  a  producer;  we  ought  to 
regard  him  in  each  capacity,  and  if  necessary  strike  a 

^  For  this  reason  Mr.  George  is  right  when  he-  maintains 
that  a  tax  on  pure  economic  rent  cannot  be  shifted.  Mr. 
Edward  Atkinson  is  in  error  upon  this  point.  Prof.  Charles  H. 
Hull  in  a  valued  criticism  on  this  matter  of  shifting  of  taxation, 
urges  forcibly  that  it  would  be  more  exact  to  put  the  matter  thus 
— "  The  possibility  of  shifting  depends  upon  the  possibility  of  the 
producer's  raising  the  price,  instead  of  restricting  the  supply." 
But  in  the  last  resort  the  raising  of  price  depends  on  restricting 
supply  except  only  where  the  demand  for  an  article  is  absolutely 
rigid. 


7^      TAXATION :  ITS  REAL   AND  APPARENT  BURDEN. 

balance  before  making  our  final  estimate  of  the  pressure 
of  taxation  he  sustains. 

Unfortunately  the  actual  problem  of  incidence  is  not 
as  simple  as  this.  While  much  of  our  public  revenue 
comes  from  the  taxation  of  commodities  in  the  hands 
of  the  producer  or  the  importer  (indirect  taxes),  even 
more  is  raised  by  taxing  individuals  irrespective  of 
what  they  consume,  on  the  basis  of  the  property  they 
ovi^n  or  the  income  they  receive.  Even  here  the  pre- 
ceding case  gives  us  a  clue  by  which  we  may  discover, 
in  a  general  way,  how  far  such  taxes  (direct  taxes)  are 
shifted.  In  general  we  saw  that  the  possibility  of  the 
producer's  shifting  a  tax  depends  on  his  power  to  re- 
strict the  supply.  What  holds  good  of  one  commodity 
produced  for  the  market  holds  good  of  the  contributions 
made  by  various  property-owners  and  income-recipients 
to  the  social  income  or  *  National  Dividend.'  Incomes  ^ 
are  ordinarily  derived  from  the  production  of  commodities 
or  the  rendition  of  services.  Sometimes  an  individual's 
income  is  from  both  sources.  When,  therefore,  a  class  of 
individuals  is  taxed,  they  will  bear  the  burden  of  the  tax 
unless  they  can  restrict  the  supply  of  goods  furnished 
or  services  rendered  by  them.  In  a  general  way  taxed 
incomes  derived  from  monopoly  sources  are  likely  to 
bear  the  burden  of  taxation.  Incomes  derived  from 
competitive  sources  will  escape  the  burden  of  taxation 

^  If  income  be  taken  in  the  widest  sense,  as  the  flow  of 
economic  advantages  per  unit  of  time,  the  benefits  derived  from 
the  actual  use  of  wealth  by  the  owner  is  a  part  of  his  true 
income.  If  a  man  lives  in  his  own  house,  the  comfort  and 
shelter  it  afifords  are  parts  of  his  real  income.  If  _A  Jets  his 
house  to  B,  A  is  making  a  contribution  to  the  social  income, 
as  much  as  though  A  manufactured  iron  goods.  If  wealth  thus 
used,  or  income-yielding  property  (in  contradistinction  to  pro- 
ductive capital  in  the  narrower  technical  sense)  be  taxed,  the 
income  it  yields  is  curtailed,  and  there  is  no  way  in  the  im- 
mediate present  by  which  such  a  tax  can  be  shifted. 


/IPPUC/tTlOht    TO   VARIOUS   CLASSES   OF  INCOME.     77 

in  so  far  as  such  sources  of  income  are  curtailed.  In 
static  conditions  such  monopoly  incomes  as  are  derived 
from  pure  economic  rent  or  from  superior  personal  abili- 
ties will  be  saddled  with  the  burden  of  taxation.  Incomes 
derived  from  invested  capital  must  suffer  from  taxes  im- 
posed thereupon,  unless  the  capital  can  be  withdrawn  ^ 
and  reinvested  in  more  advantageous  ways,  or  until  re- 
stricted investments  raise  the  income  from  such  capital. 
Taxes  imposed  on  wage  incomes  (unless  skilled  abilities 
limited  in  supply  give  a  quasi-monopoly  wage)  can  only 
be  shifted  when  the  supply  of  labor  is  decreased.  This 
implies  a  checked  growth  of  the  numbers  of  unskilled 
workmen — a  process  which  is  generally  slow  and  always 
more  or  less  uncertain,  although  freedom  of  movement 
aids  in  cutting  down  the  over-supply  of  labor  in  given 
localities. 

Besides  the  general  conditions  laid  down,  any 
bar  to  the  action  of  unrestricted  competition  between 
parties  to  avoid  the  brunt  of  taxation  must  modify  the 
general  principles  of  the  incidence  of  taxation.  In  ac- 
tual finance  the  question  of  the  incidence  of  specific  taxes 
must  be  determined  by  considering  how  far  the  general 
laws  already  enunciated  are  modified  by  concrete  cir- 
cumstances. 

Supplementary  Note. 

There  are  certain  problems  which  concern  incidence 
as  regards  individuals  rather  than  as  regards  typical 
social  classes.  Examples  of  such  problems  are  the 
method  of  shifting  taxation  by  capitalization.  A  certain 
piece  of  property  is  burdened  with  a  tax.     The  tax  re- 

'An  equal  tax  on  all  capital  is  a  practical  impossibility.  If 
theoretically  possible,  the  tax  on  the  income  from  such  invest- 
ments could  be  shunted  only  by  a  general  decrease  in  the 
growth  of  the  future  capital.     Where  debts  secured  by  mort- 


78       TAXATION:  ITS  RBaL   AND  APPARENT  BUrDHN. 

duces  the  net  yield  of  the  property  in  question,  and  con- 
sequently its  aapitalized  value.  So  that  a  purchaser  will 
ordinarily  shift  the  whole  burden  of  tl.c  tax  upon  the 
erstwhile  owner  by  according  a  reduced  price  for  the 
property.  That  is,  the  original  owner  cannot  shift  the 
tax  by  selling  the  property.  Another  analogous  problem 
is  presented  by  equal  incomes  similar  in  their  economic 
origin.  Ceteris  paribus  the  burden  imposed  on  each  in- 
come will  be  the  same.  It  may  happen,  however,  that  a 
great  portion  of  one  income  is  expended  upon  articles 
whose  prices  are  largely  taxes  in  disguise,  whereas  a 
small  part  or  perhaps  no  part  at  all  of  the  other  income 
is  expended  upon  such  taxed  products.  In  this  case  the 
amount  of  taxation  borne  by  the  first  income  is  greater 
than  that  borne  by  the  second.  It  is  perhaps  question- 
able whether  this  is  of  great  importance  for  practical 
finance  where  classes  must  be  dealt  with  as  classes. 

gages  are  practically  the  only  kind  of  personal  property  taxed, 
the  lender  shifts  the  tax  to  the  borrower  by  exacting  a  rate  of 
interest  high  enough  to  cover  the  tax.     See  p.  126. 


CHAPTER   Iir. 
TAXATION  :  ITS  EQUITABLE   DISTRIBUTION. 

Nature  of  the  Problem. — In  the  preceding  chapter 
a  matter  of  fact  was  discussed ;  in  this  chapter  a  ques- 
tion of  right  is  involved.  Where  the  stresses  of  the 
tax  load  are  actually  distributed  throughout  the  eco- 
nomic structure  is,  in  a  general  way,  known.  How  this 
burden  ought  to  be  distributed  is  largely  a  matter  of  dis- 
pute. The  question  of  public  equity  is  nowhere  freighted 
with  greater  significance  than  in  the  domain  of  taxation. 
The  issue  is  an  ethical  one  and  of  far-reaching  impor- 
tance. Thoroughly  to  exploit  it  would  involve  a  search- 
ing analysis  of  the  very  foundations  of  morals.  The 
question  of  equity  in  taxation  is  by  no  means  wholly  or 
principally  a  problem  of  the  mere  adjustment  of  adminis- 
trative detail.  Even  current  discussion  of  the  Single 
Tax  proposal  or  of  the  now  defunct  Income  Tax  could 
not  content  itself  with  surface  generalizations.  The  very 
foundations  of  society,  of  private  property,  of  liberty  as 
now  known  to  law,  are  challenged.  Here  as  elsewhere 
the  house  economic  is  divided  against  itself,  and  the 
question  of  the  distribution  of  taxation  is  a  crucial  ques- 
tion. It  is  "  quick  and  powerful,"  and  pierces  "  even  to 
the  dividing  asunder "  of  collectivists  who  would  fain 
retain  the  benefits  of  competition,  and  of  individualists 
who  perhaps  regretfully  shut  their  eyes  to  what  they 
regard  as  the  4elusive  dreams  of  a  socialistic  Utopia. 

79 


8o  TAXATION:  ITS  EQUITABLE  DISTRIBUTION. 

There  are  indeed  those  who  deny  that  abstract  equity 
can  be  regarded  either  in  the  framing  of  tax  laws  or  in 
their  enforcement.  Cumbered  with  the  multifarious 
worries  of  fiscal  administration,  they  exalt  the  necessity 
or  perhaps  the  convenience  of  the  fisc  into  a  guiding 
principle  to  which  all  else  is  subordinate  and  must  con- 
form. For  them,  as  for  Colbert,  "  the  supreme  art  of 
taxation  "  is  "  to  pluck  the  greatest  amount  of  feathers 
with  the  least  amount  of  squalling,"  Or,  as  McCulloch  ^ 
more  decorously  puts  it :  "  The  characteristic  of  the  best 
tax  is  not  that  it  is  most  nearly  proportioned  to  the 
means  of  individuals,  but  that  it  is  easily  assessed 
and  collected,  and  is  at  the  same  time  most  conducive  to 
the  public  interests." 

This,  however,  is  no  solution  of  the  problem  of  equity 
in  taxation.  It  is  rather  the  despair  of  finding  any  solu- 
tion. A  perfectly  equitable  tax  system  may  be  an  un- 
attainable ideal.  But  this  does  not  absolve  us  from  all 
effort  making  for  approximate  justice. 

Broadly  speaking,  we  may  say  that  three  generic 
schemes  ofTer  themselves  as  supplying  norms  of  justice 
in  taxation.  These  three  are,  respectively,  Confiscation, 
Progression,  Proportion.  The  confiscatory  proposal  is 
based  upon  the  allcj^^ed  injustice  of  certain  kinds  of  pri- 
vate property  and  the  incomes  flowing  therefrom.  Re- 
dress these  evils,  it  is  urged,  by  restoring  to  society  that 
which  is  rightfully  its  own,  and  taxation  will  take  care 
of  itself.  This  is  the  claim  of  Mr.  George  and  his  ad- 
herents. T!ms  is  also  the  demand  of  those  who  would 
impose  upon  certain  monopolies  the  entire  burden  of 
taxation. 

The  adherents  of  progressive  taxation  occupy  a  less 
extreme  position.     They  concede  it  to  be  the  duty  of 

*Ta??ation  and  Funding,  p.   i8, 


THE  CONFISCATORY  THEORY.  8 1 

practically  all  subjects  of  the  state  to  make  sacrifices  for 
the  state.  But  they  would  impose  the  heavier  burdens 
upon  the  wealthy,  and  would  thus  exempt  wholly  or  in 
part  those  who  have  but  little.  Lastly  come  those  who 
insist  upon  the  universality  of  the  duty  of  supporting 
the  government,  but  who  would  distribute  the  weight 
of  taxation  always  in  strict  proportion  either  to  the  re- 
sources of  the  contributors  or  to  the  benefits  they  sev- 
erally derive  from  the  state. 

The  Confiscatory  Theory. — The  most  famous  of  the 
confiscatory  theories  is  Mr.  George's  proposal  that  pure 
economic  rent  ^  in  its  entirety  be  taken  by  way  of  taxa- 
tion. This  claim  is  based  upon  his  contention  that  natu- 
ral equity  does  not  permit  private  property  in  land.  It 
is  at  once  evident  that  the  issue  here  raised  involves  the 
basal  principles  of  social  organization.  Mr.  George's 
argument  may  be  briefly  stated  as  follows:  The  sole 
and  ultimate  justification  of  private  property  is  rooted 
in  "  the  right  of  a  man  to  himself,^  to  the  use  of 
his  own  powers,  to  the  enjoyment  of  the  fruits  of 
his  own  exertions.  ...  As  a  man  belongs  to  him- 
self, so  his  labor  when  put  in  concrete  form  belongs 
to  him."  Only  when  these  powers  are  embodied  in 
a  product  is  the  product  rightfully  his.  Land  is  not 
the  product  of  human  labor,  and  thus  cannot  right- 
fully be  held  in  private  ownership.  Such  a  material 
product  as  a  pen,  for  example,  is  rightly  and  ab- 
solutely and  exclusively  the  property  of  its  producer 
or  of  the  one  to  whom  the  producer  has  transferred  it. 

^  For  those  not  conversant  with  ordinary  economic  terms 
it  may  be  worth  while  to  state  that  Mr.  George  proposes  that 
such  part  of  real  estate  incomes  as  are  in  excess  of  the  interest 
upon  the  capital  invested  in  improving  the  land  or  in  building 
thereon  shall  be  absorbed  by  taxes.  He  does  not  advocate 
the  confiscation  of  the  entire  income  from  real  estate. 

*  Progress  and  Povertj^,  p.  299  .s^. 


82  TAXATION:  ITS  EQUITABLE  DISTRIBUTION. 

"  No  Other  human  being  can  rightly  lay  claim  to  it." 
But  no  similar  claim  can  be  made  for  private  ownership 
of  land. 

The  obvious  answer  to  Mr.  George's  allegation  is  co- 
gently put  by  Prof.  Sidgwick.^  "  Human  labor  is  ob- 
viously not  the  cause  of  the  matter  of  any  material 
product,  but  only  of  its  form;  therefore,  if  a  man  is  to 
have  the  right  of  property  in  the  product,  he  must  have 
already  been  allowed  to  ajipropriate  the  material;  and 
this  preliminary  appropriation  will  require  justification." 
This  logical  demolition  of  Mr.  George's  argument  seems 
to  me  to  be  indefeasible.  If  private  property  in  material 
chattels  is  justifiable,  there  is  no  reason  a  priori  why 
private  ownership  of  land  may  not  also  be  justifiable. 
As  Mr.  Rae  says,  "  Land  is  as  much  the  creation  of  man 
as  anything  else,  and  everything  is  as  much  a  gift  of 
God  as  land."  Whatever  be  the  fundamental  justifica- 
tion of  private  property,  to  maintain,  as  Mr.  George 
does,  that  chattels  may  rightly  be  the  subject  of  private 
property,  but  land  may  not,  is  to  attempt  at  the  same 
time  "  to  hold  with  the  hare  and  run  with  the  hound." 
It  is  perfectly  allowable,  of  course,  to  argue,  as  Mr. 
George  subsequently  does,,  that  the  well-being  of  society 
will  be  the  better  secured  by  the  state's  virtual  acquisi- 
tion of  the  soil.  But  to  adopt  this  line  of  argument  is 
in  itself  a  change  of  venue.  The  proud  claim  of  securing 
an  immediate  intuitive  verdict  from  the  supreme 
tribunal  of  natural  equity  against  private  landownership 
has  been  abandoned;  and  the  case  has  thus  been  re- 
manded to  the  lower  court  of  social  utility.  The  con- 
tention of  the  Single  Tax  advocates  now  takes  this  form. 


*  Political  Economy,  p.  503.  Cf.  also  Grotius  de  Jure  Belli 
et  Pads,  III.,  iii..  §  3;  Huxley,  Method  and  Results,  Essays,  p. 
^72;  Rae,  Contemporary  Socialism,  p.  4^8. 


THE  CONFISCATORY   THEORY.  83 

Taxation  should  absorb  the  totality  of  economic  rent, 
because  under  the  system  of  private  landownership  the 
entire  increase  of  wealth  must  theoretically  inure  to  the. 
exclusive  benefit  of  the  landowner.  Such,  they  claim,^ 
has  historically  been  the  case.  That  this  is  the  contention 
of  Mr.  George  is  proved  by  the  following  extract^ :  "  Land 
being  necessary  to  labor,  and  being  reduced  to  private 
ownership,  every  increase  in  the  productive  power  of 
labor  but  increases  rent,  the  price  that  labor  must  pay 
for  the  opportunity  to  utilize  its  powers ;  and  thus  all  the. 
advantages  gained  by  the  march  of  progress  go  to  the  own- 
ers of  land,^  and  wages  do  not  increase.  Wages  cannot 
increase;  for  the  greater  the  earnings  of  labor  the  greater 
the  price  that  labor  must  pay  out  of  its  earnings  for  the 
opportunity  to  make  any  earnings  at  all.  The  mere  la- 
borer has  thus  no  more  interest  in  the  general  advance 
of  productive  power  than  the  Cuban  slave  has  in  an  ad- 
vance in  the  price  of  sugar." 

If  this  presentation  of  the  facts  corresponded  with  the 
facts  themselves,  even  Mr.  George's  remedy  would 
hardly  seem  too  high  a  price  to  pay  for  our  economic 
regeneration.  But  both  theoretically  and  historically 
Mr.  George  is  in  error.  Every  increase  in  productive 
power  normally  increases  the  demand  for  the  various 
factors  necessary  to  production.  But  in  what  propor- 
tion the  demand  for  land,  capital,  and  labor  (both  manual 
and  directive)  will  increase  is,  in  general,  unpredictable. 
It  is  a  gratuitous  assumption,  however,  to  assert  that 
increased  productive  power  will  enhance  the  demand  for 
land  only.3  Thoroughly  to  sift  Mr.  George's  historical 
contention,  that  as  a  matter  of  fact  the  entire  increase 

*  Progress  and  Poverty,  p.  255. 

^  The  italics  are  not  in  the  original. 

*  Cf.  F.  A.  Walker,  Political  Economy  (Advanced  Course), 
p.  419  sq.,  for  an  examination  of  George's  theoretical  argument. 


84  TAXATION:  ITS  EQUITABLE  DISTRIBUTION. 

of  productive  power  has  exclusively  benefited  the  land- 
owning class,  would  take  us  too  far  afield. ^  The  same 
must  be  said  about  his  assertion  as  to  the  increase  of 
poverty.  This  latter  subject  indeed  hardly  falls  witliin  the 
scope  of  Public  P^inance.  Similar  reasons  also  must  bar 
out  any  discussion  of  the  various  compensatory  or  quasi- 
compensatory  schemes  of  land  nationalization.  Suffice 
it  to  say  that  neither  theoretically  nor  as  a  matter  of 
common  observation  is  the  private  ownership  of  land 
tantamount  to  the  exploitation  of  the  landless  classes. 
The  labor  theory  which  Mr.  George  has  erected  is  ob- 
viously untenable  as  a  fundamental  ethical  basis  for 
private  property.  His  utilitarian  argvunent  for  the  ne- 
cessity of  the  state's  acquisition  of  land  proves  upon 
examination  to  be  theoretically  and  historically  incon- 
clusive. Whatever  then  be  the  moral  basis  upon  which 
private  property  in  land  is  to  be  theoretically  justified,- 
the  confiscatory  gospel  of  the  Single  Tax  advocates  can 
hardly  be  accounted  an  enlightened  solution  of  the 
problem  of  the  just  distribution  of  taxes. 

'  Cf.  Rae,  Contemporary  Socialism,  Ch.  XII.,  second  edition; 
Seligman,  Essays  in  Taxation,  especially  the  examination  of  the 
Single  Tax  theory,  Ch.  III. 

'  The  argument  in  the  text  in  reference  to  the  ethical  basis 
of  private  property  is  entirely  critical  and  destructive.  Person- 
ally, I  do  not  sympathize  with  the  view  very  generally  accepted 
by  American  economist.s  that  Social  Utility  and  Right  are  con- 
vertible terms,  and  the  same  in  essence.  For  the  individual 
I  hold  that  alone  to  be  Right  v/hich  realizes  or  tends  to  realize 
his  personality  as  a  rational  being.  Similarly  for  society  that 
alone  is  Right  which  realizes  or  tends  to  realize  the  rational 
personalities  of  its  constituent  members.  Now,  Society  like  the 
individual  is  environed  in  a  milieu  where  the  struggle  for  exist- 
ence prevails.  This  preconditioning  law  is  inevitable.  Private 
property  I  believe  to  be  the  most  efficacious  method  yet  de- 
vised to  minimize  the  suffering  involved  in  the  struggle  for 
existence.  Private  property  thus  secures  the  possibility  for  the 
greatest  self-realization  of  the  rational  persons  who  constitute 
Society.  This  is,  in  my  opinion,  its  moral  justification.  In 
short,  felicific  tendency  is  frequently  an  index  or  exponent  of  the 
Right,  but  is  not  Right  in  essence. 


THE  CONFISCATORY   THEORY,  85 

There  are  those  who  do  not  confine  their  attention 
to  the  taxation  of  economic  rent,  but  who  argue  that  rent 
is  only  a  species  of  a  large  genus  of  gains — all  of  them 
unearned.  Thus  certain  monopolized  enterprises  or 
speculative  gains  are  to  be  singled  out  for  taxa- 
tion. Apart  from  the  probable  inadequacy  of  revenue 
so  derived  to  meet  the  wants  of  the  government, 
the  objections  to  such  a  policy  are  weighty.^  The 
speculative  investment  of  capital  in  new  enterprises 
is  roughly  based  upon  the  average  return  thus  obtain- 
able. This  average  return  is  made  up  of  hits  and  misses. 
The  point  is  well  illustrated  by  a  story  told  of  a  promi- 
nent financier  who,  upon  deciding  to  invest  in  a  projected 
railroad,  remarked  that  he  would  either  lose  a  hundred 
and  fifty  thousand  dollars  or  make  a  million  and  a  half 
in  the  venture.^  If  every  lucky  investment  is  to  be  re- 
garded as  prima  facie  evidence  of  theft,  or  at  least  of 
unearned  wealth,  the  average  inducement  to  make  such 
ventures  will  be  materially  weakened,  and  society  will 
suffer  no  less  than  the  individual  who  is  thus  fined  for 
his  ingenuity.^  Moreover,  when  the  source  of  monopoly 
or  unearned  profits  has  been  once  transferred  from  the 
original  owner,  special  or  exclusive  taxation  involves  the 
expropriation  of  property  owners  who  acquired  their  title 
by  indefeasible  right.  Thus  a  lawyer  may  out  of  his 
professional  earnings  buy  stock  in  a  successful  industrial 
company.  The  value  of  the  stock  may  have  been  origi- 
nally "  unearned,"  but  the  present  holder's  moral  title 
is    not    thereby   affected.     If    society    through    the    tax- 

'  Cf.  Bastable,  Public  Finance,  p.  309. 

"  He  is  said  to  have  added  that  if  he  did  the  former,  the  public 

would  say  he  was  '  a  d fool,'  and  if  he  did  the  latter,  they 

would  say  he  was  '  a  d thief.' 

'Of  course  where  public  franchises  are  a  source  of  unusual 
profits,  special  taxation  may  be  only  a  just  return  for  the  privi- 
leges accorded. 


86  TAXATION:  ITS  EQUITABLE   DISTRIBUTION. 

collector  is  to  mulct  any  one,  it  ought  to  be  the  original 
beneficiary  of  the  rise  in  the  stock's  market  value.  It 
hardly  requires  to  be  said  that  fiscal  administration  can- 
not undertake  as  preliminary  to  the  imposition  of  taxes 
the  determination  of  the  original  equitable  acquisition  of 
property. 

The  Theory  of  Progressive  Taxation. — However  the 
taxpayer's  ability  be  measured,  whether  by  income  or  by 
property  or  by  consumption,  the  theory  of  progressive 
taxation  contemplates  the  exaction  of  a  larger  propor- 
tional slice  from  the  greater  means  than  from  the  lesser. 
This  proposed  canon  of  equity  is  supported  on  two  dis- 
tinguishable, though  not  always  distinct,  grounds.  First, 
it  is  based  upon  what  is  called  the  politico-social  theory 
of  taxation;  second,  it  is  founded  on  the  contention  that 
progressive  taxation  is  a  more  exact  measure  of  ability 
than  rigidly  proportional  taxation  which  takes  the  same 
fraction  from  all  resources,  be  they  great  or  small.  The 
politico-social  theory  of  taxation  ^  is  essentially  an  at- 
tempt to  correct  by  means  of  progressive  taxation  the 
inequalities  of  the  competitive  distribution  of  wealth. 
The  attitude  of  its  supporters  is  Janus-like.  They  face 
both  Collectivism  and  Competition.  They  hold  that  a 
little  stealing  is  not  a  dangerous  thing,  provided  the  state 
commits  the  theft.  This  rule  is  unsound,  because  it  is 
based  on  the  idea  that  the  state  can  beneficially  interfere 
with  economic  distribution  by  acts  which  weaken  the 
incentives  to  accumulation.  The  second  claim  which  is 
made  for  the  progressive  principle  is  much  more  weighty. 
The  rich,  it  is  argued,  are  abler  far  to  contribute  to  the 
needs  of  the  state  than  are  the  poor.  They  are  able, 
moreover,  to  contribute  a  larger  proportional  share  of 
their  total  resources  than  are  their  less  fortunately  cir- 

'Wagner,   Finanzwissenschaft,  II.,  p.  207  sq.  and  p.  405  sq. 


THE   THEORY  OF  PROGRESS/ l^E    TAXATION.  87 

cumstanced  neighbors.  Though  the  rich  give  more  than 
the  rest,  both  absolutely  and  relatively,  still  more  remains 
at  their  disposal  when  the  taxes  have  been  paid  in.  As 
Paley  ^  put  it,  "  the  point  to  be  regarded  is,  not  what  men 
have,  but  what  they  can  spare." 

A  careful  preliminary  definition  of  the  taxpayer's 
ability  will  clarify  the  discussion  of  the  moot  question 
of  progressive  versus  proportional  taxation.  It  is  evi- 
dent that  ability  must  in  some  degree  be  related  to  in- 
come. This  latter  term  designates  the  amount  of  com- 
modities received  and  services  enjoyed  within  a  given 
period.  A  man's  income  in  its  broadest  sense  includes 
the  economic  satisfactions  received  within  a  given  period. 
Property  itself  is  of  value  only  as  a  source  of  income. 
It  is  not  the  only  source,  but  it  is  one  of  the  two  ulti- 
mate sources,  labor  being  the  other.  Income  again  must 
be  differentiated  into  gross  income  and  net  income. 
The  former  is  the  total  periodic  influx  of  commodities 
and  services,  while  the  latter  is  determined  by  de- 
ducting from  gross  income  all  cost  involved  in  its  acquisi- 
tion, excepting  the  exertion,  if  any,  on  the  part  of  the 
recipient.  For  example,  A  is  a  manufacturer.  His 
annual  sales  (gross  income)  amount  to  $100,000.  His 
expenses  of  production  are  $85,000.  His  net  income  is 
$15,000.  In  many  cases  gross  income  and  net  income 
coincide.  Thus  an  ordinary  laborer's  wages  usually  suf- 
fer no  deduction  for  the  tools  he  uses  or  the  material  on 
which  he  works. 

Does  equity  in  taxation  then  prescribe  a  strictly 
proportional  levy  upon  net  incomes  or  does  it  prescribe 
a  rising  rate  upon  the  higher  net  incomes  ?  Some  allege 
that  the  higher  net  incomes  should  be  assessed  at  the 

*  Elements  of  Political  Knowledge,  Ch.  XI.  He  is  here 
speaking  of  gross,  not  net,  income. 


S8  TylXATION:  ITS  EQUITABLE  DISTRIBUTION. 

higher  rate,  inasmuch  as  ''  to  take  loo/.  from  looo/.  is  a 
heavier  impost  than  looo/.  taken  from  10,000/."  ^  It  is  not 
altogether  easy  to  see  any  rational  l^asis  for  such  a  claim. 
It  is  probably  true  that  if  a  person  A  with  an  unchanged 
scale  of  wants  and  a  fixed  standard  of  living  should  at  one 
time  lose  $100  out  of  $1000,  he  would  feel  the  loss  more 
severely  than  if  he  lost  at  another  time  (when  his  posses- 
sions were  greater  and  his  wants  not  enlarged)  $100  ) 
out  of  $10,000.  In  the  first  place,  however,  one's  standard 
of  living  is  almost  certain  to  keep  pace  with  one's  income. 
And  even  if  itdidnot,  the  argument  is  wholly  inconclusive, 
inasmuch  as  it  assumes  that  zvhat  is  true  of  the  same  man 
at  tzi'o  diifcrcnt  times  is  true  of  two  different  men  at  the 
same  time,  and  that  A  would  feel  the  loss  of  $100  out  of 
$1000  more  severely  than  B  would  feel  the  loss  of  $1000 
cut  of  $10,000.  Until  some  better  proof  of  this  assertion 
is  ofTered,  one  may  well  remain  skeptical  in  regard 
thereto.2  The  higher  net  incomes  are  the  usual  con- 
comitants of  higher  standards  of  living,  and  that  a  cur- 
tailment of  the  greater  expenses  would  be  less  felt  than 
a  proportional  retrenchment  on  the  part  of  less  preten- 
tious establishments  is  open  to  the  gravest  doubt.  Tlie 
case,  then,  for  progressive  taxation  cannot  be  said  to  be 
proved.  Two  qualifications,  however,  ought  to  be  added: 
first,  that  any  system  of  strictly  proportional  taxation 
based  on  net  income  would  be  essentially  a  species  of 
progressive  taxation.     Very  small  incomes  cannot  prac- 

'  Mill,  Political  Economy,  Bk.  V.,  Ch.  TT..  §  3.  Mill  is  here 
speaking  of  gross  income,  however,  and  practically  denies  this 
contention  except  as  applicable  to  the  minimum  of  subsistence. 

'  It  ought  also  to  be  said  that  no  regard  is  here  paid  to  the 
source  of  income  as  affecting  the  necessity  fif  saving  for  the 
future.  Equal  net  incomes  (as  defined)  from  landed  property 
and  from  personal  exertions  are  not  perfectly  fair  indices  of 
e(|ual  ability,  for  the  latter  stops  with  the  death  of  the  recipient, 
while  the  former  continues. 


THE   THEORY  OF  PROPORTIONAL    TAXATION.        89 

tically  be  reached.  Even  if  they  could,  the  cost  of  tax- 
collection  would  make  the  attempt  to  reach  them  unwise. 
Practically  this  amounts  to  degressive  taxation  so 
called,  namely  the  exemption  of  the  minimum  of  sub- 
sistence. The  second  qualification  is  that  a  decision  ad- 
verse to  progressive  taxation  as  a  general  system  does 
not  necessitate  the  rejection  of  specific  progressive  taxes 
among  the  constituent  parts  of  a  tax  system.  Thus  a 
progressive  income  tax,  such,  for  example,  as  one  which 
exempts  incomes  up  to  a  certain  amount,  may  be  a  neces- 
sary correction  of  fiscal  inequalities  resulting  from  taxes 
upon  the  consumption  of  necessities  which  absorb  a 
greater  fraction  of  small  incomes  than  of  large.^ 

The  Theory  of  Proportional  Taxation. — ^We  have 
found  reason  for  rejecting  confiscation  and  progression 
as  norms  of  fiscal  justice  in  the  distribution  of  taxation. 
There  remains  the  third  scheme  of  proportional  taxation. 
The  first  question  which  arises  in  regard  to  propor- 
tional taxation  is,  proportioned  to  what  ?  In  very  young 
economic  communities  a  rough  approximation  to  justice 
is  attempted  by  laying  taxes  in  proportion  to  numbers, 
and  by  taxing  every  man  alike.  This  is  a  primitive 
poll-tax.  But,  as  Bentham  2  says,  "  because  a  man  has 
a  head,  it  does  not  follow  that  he  has  anything  else," 
and  the  unfairness  of  such  a  distribution  of  taxes  is  soon 
apparent.  According  to  what  then  ought  taxes  to  be 
proportioned  ?  In  this  matter  one  may  readily  subscribe 
to  what  is  essentially  Prof,  von  Helferich's  ^  view,  which 


*  Another  powerful  objection  to  the  progressive  taxation  is 
that  it  renders  impossible  the  administrative  method  of  "stop- 
page at  the  source."     See  p.  186  and  p.  189. 

'  Principles  of  the  Civil  Code,  Ch.  XV. 

'  Schonberg's  Handbuch,  Vol.  III.,  p.  136,^9.  Prof.  v.  Helfe- 
rich  distinguishes  between  the  necessary  and  optional  functions 
of  government 


90  TAXATION:  ITS  EQUITABLE  DISTRIBUTION. 

may  be  stated  thus:  Government  benefits  when  general  in 
character  and  incapable  of  measurement  or  allotment  should 
be  paid  for  from  taxes  levied  on  the  basis  of  the  subject's 
net  resources:  government  benefits  when  concrete,  specific, 
a)id  measurable  should  be  paid  for  by  the  individual  re- 
cipients of  such  benefits.  There  are  certain  offices  which 
the  state  performs  which  are  advantageous  to  all  its  sub- 
jects. Such  are  the  protection  of  life  and  property.  It 
is  futile  to  try  to  determine  what  individuals  or  classes 
are  most  (or  least)  benefited  by  such  state  services. 
"  Government,"  as  Mill  ^  says,  "  must  be  regarded  as  so 
pre-eminently  a  concern  of  all,  that  to  determine  who  are 
most  interested  in  it  is  of  no  real  importance."  As  it 
is  impossible  to  measure  the  relative  advantages  derived 
by  various  classes  of  individuals  from  sucli  public  ser- 
vices, it  seems  a  fair  presumption  that  the  same  propor- 
tional deduction  from  each  one's  net  resources  is  as  fair 
an  approximation  to  what  Mill  calls  "  equality  of  sacri- 
fice "  as  can  reasonably  be  attained.  Hence  the  first 
part  of  the  canon. 

On  the  otlier  hand,  it  would  be  folly  to  ignore  the  fact 
that  certain  government  services  do  specially  and  spe- 
cifically benefit  particular  individuals  mainly  or  perhaps 
exclusively.  Thus  a  municipality  paves  a  street  and 
I.cnefits  to  a  large  extent  the  al)utting  property  owners. 
Or  it  grants  a  local  transit  company  a  franchise  and  thus 
assures  the  corporation  a  paying  business.  Or  a  post- 
man is  sent  to  deliver  a  special  deliver}-  letter,  and  the 
sender  is  the  particular  beneficiary.  In  these  and  similar 
cases  the  benefit  afforded  is  largely  specific  and  its  cost 
is  measurable.     In  such  cases,  therefore,  there  is  good 


'  Political  Economy,  Book  V.,  Ch.  II.  See  here  Mill's 
refutation  of  the  idea  that  relative  benefits  can  be  measured  by 
the  respective  incomes  enjoyed  under  the  protection  of  the  state. 


THE   THEORY  OF  PROPORTIONAL   TAXATION.        91 

reason    for    exacting    the    price    of   the    service    or    the 
aflforded  privilege  from  the  one  thus  signally  advantaged. 

Supplementary  Note. 

The  further  question  may  be  asked  whether  the  price 
charged  by  way  of  a  tax  or  quasi-tax  ought  to  be  gradu- 
ated so  as  merely  to  cover  the  cost  of  service  (or  the  value 
of  the  public  rights  surrendered),  or  whether  the  tax 
should  rise  above  this  margin,  if  possible,  so  as  to  measure 
the  advantage  conferred  on  the  beneficiary  in  question. 
For  example,  suppose  the  average  cost  of  special  postal 
delivery  to  be  ten  cents  per  letter,  and  suppose  that  a 
charge  of  fifteen  cents  per  letter  could  be  exacted  with- 
out any  sensible  diminution  in  the  demand  for  such  postal 
service.  Which  rate  ought  to  be  asked  ?  This,  I  fancy, 
is  a  question  which  must  be  determined  by  a  large  num- 
ber of  collateral  considerations,  such  as  the  current  need 
of  revenue,  the  indirect  effects  of  such  public  services, 
the  general  character  of  such  letters — commercial,  social, 
or  otherwise.  In  general,  however,  it  ought  to  be  re- 
membered that  the  government  has  no  interest  analogous 
to  that  of  a  private  firm  in  making  a  net  profit  out  of  the 
enterprises  it  conducts.  Provided  the  cost  is  covered, 
the  sacrifice  of  net  profits  corresponds  to  an  increase  in 
the  "  consumer's  rent  "  obtained  by  the  one  who  employs 
the  government  agency. 


CHAPTER  IV. 
TAXATION  :   ITS  PRACTICAL  EFFICIENCY. 

Adequacy  of  Tax  Revenue. — Up  to  this  point  we  have 
studied  taxation  mainly  on  its  outer  side.  That  is  to 
say,  we  have  viewed  taxation  primarily  as  an  objective 
economic  phenomenon,  and  have  not  asked  what  rules 
should  guide  the  financier  with  whom  rests  the  origina- 
tion or  the  execution  of  tax  laws.  At  this  point  we  take 
up  the  subject  of  taxation  on  its  inner  side,  as  it  were, 
and  inquire  what  principles  must  guide  the  legislator 
and  finance  minister  in  this  business  of  raising  revenue. 
The  general  features  of  taxation  he  must,  of  course,  un- 
derstand. The  essential  nature  of  a  tax,  its  processes  of 
shifting,  the  applicable  norms  of  equity — all  these  con- 
stitute an  indispensable  part  of  a  financier's  equipment. 
But  they  are  rather  the  postulates  on  which  he  acts  than 
the  problems  which  immediately  press  upon  him  for 
solution.  The  paramount  demand  zvhich  a  practical  finan- 
cier makes  upon  any  fax  system  is  that  it  ftiniish  revenue 
sufficient  for  public  needs.  Tt  is  indeed  desirable  that  a 
tax  system  be  popular;  it  is  important  that  it  be  just; 
but  it  is  absolutely  essential  that  it  furnish  adequate 
revenue.  Adequacy  in  finance  is  like  charity  among  the 
virtues.  Its  absence  renders  all  collateral  excellences 
as  nothing,  and  its  presence  covers  a  multitude  of  sins. 
Tt  therefore  becomes  a  matter  of  prime  importance  to 
determine,  first,  how  a  tax  system  is  to  be  constituted 

93 


SINGLE  AND  MULTIPLE   TAX  SYSTEMS.  93 

which  will  afford  the  requisite  amount  of  revenue;  and 
secondly,  to  determine  how  to  administer  such  a  system 
most  advantageously,  having  regard  to  the  interest  both 
of  the  public  treasury  and  of  the  individual  taxpayer.^ 

Single  and  Multiple  Tax  Systems. — If  we  approach 
this  subject  from  a  purely  a  priori  standpoint,  nothing 
would  seem  more  natural  than  that  the  aggregate 
amount  taken  by  taxation  should  be  raised  by  a  single, 
uniform  process,  rather  than  collected  by  multiple,  im- 
perceptible, and  devious  agencies.^ 

We  have  seen  that  taxation  is  in  essence  a  diminution 
of  the  amount  of  income  at  the  disposal  of  the  individual. 
It  does  not  increase  the  amount  that  is  deducted  from 
individual  enjoyment  and  use  to  take  it  in  a  single  lump 
sum,  or,  at  least,  to  take  it  by  a  single,  uniform  process 
of  collection.  Indeed  there  is,  it  would  seem,  good 
ground  for  believing  that  actually  less  would  be  taken 
from  the  taxpayer  if  tax  collection  could  thus  be  more 
economically  prosecuted.  How  then  are  we  to  explain  the 
seeming  anomaly  that  everywhere  there  is  a  multiplicity 
of  taxes  and  a  variety  of  methods  of  tax  collection  ?  No 
more  vivid  picture  of  a  plague  of  taxes  has  ever  been 
given  than  by  Sydney  Smith,^  who  described  the  EngHsh 

'  Wagner  entitles  his  two  politico-financial  canons  of  taxa- 
tion Adequacy  and  Elasticity.  Cf.  his  Finanzwissenschaft,  Vol. 
II.,  p.  304.  To  a  certain  extent  one  implies  the  other,  but  inas- 
much as  exceptional  needs  of  the  fisc  are  met  both  by  increased 
taxes  and  by  loans,  I  have  judged  the  matter  of  Elasticity  may 
be  properly  treated  under  the  discussion  of  equilibrium  between 
Income  and  Expenditure. 

*  A  single  tax  system,  it  must  be  ufiderstood,  does  not  neces- 
sarily involve  an  exclusive  tax  upon  any  one  particular  object 
of  wealth  such  as  land.  Mr.  George  proposed  to  tax  only  rental 
values,  it  is  true,  but  this  is  but  one  out  of  many  possible  single 
tax  schemes.  If  all  taxes  whatever  were  raised  by  a  single 
assessment  upon  general  property  alone,  we  should  have  an 
example  of  a  single  tax  system. 

'  Edinburgh  Review,  1820,  Vol.  a,  p.  77. 


94  T/IXATION:  ITS  PRACTICAL   EFFICIENCY. 

tax  system  in  force  after  the  Napoleonic  struggle  as  fol- 
lows :  "  We  can  inform  Jonathan  what  are  the  inevitable 
consequences  of  being  too  fond  of  glory; — Taxes  on 
every  article  which  enters  into  the  mouth,  or  covers  the 
back,  or  is  placed  under  foot — taxes  on  everything  which 
is  pleasant  to  see,  hear,  feel,  smell,  or  taste — taxes  upon 
warmth,  light,  and  locomotion — taxes  on  everything  on 
earth,  and  the  waters  under  the  earth — on  everything 
which  comes  from  abroad,  or  is  grown  at  home — taxes 
on  the  raw  material — taxes  on  every  fresh  value  that  is 
added  to  it  by  the  industry  of  man — taxes  on  the  sauce 
that  pampers  man's  appetite,  and  the  drug  which  restores 
him  to  health — on  the  ermine  which  decorates  the  judge, 
and  the  rope  which  hangs  the  criminal — on  the  poor 
man's  salt  and  the  rich  man's  spice — on  the  brass  nails 
of  the  cofifin,  and  the  ribands  of  the  bride — at  bed  or 
board,  couchant  or  levant,  we  must  pay : — The  schoolboy 
whips  his  taxed  top — the  beardless  youth  manages  his 
taxed  horse,  with  a  taxed  bridle  on  a  taxed  road : — and 
the  dying  Englishman,  pouring  his  medicine  which  has 
paid  7  per  cent.,  into  a  spoon  that  has  paid  15  per  cent. — 
filings  himself  back  upon  his  chintz-bed  which  has  paid  22 
per  cent. — makes  his  will  on  an  eight  pound  stamp,  and 
expires  in  the  arms  of  an  apothecary  who  has  paid  a 
license  of  a  hundred  pounds  for  the  privilege  of  putting 
him  to  death.  His  whole  property  is  then  immediately 
taxed  from  2  to  10  per  cent.  Besides  the  probate,  large 
fees  are  demanded  for  burying  him  in  the  chancel ;  his 
virtues  are  handed  down  to  posterity  on  taxed  marble ; 
and  he  is  then  gathered  to  his  fathers, — to  be  taxed  no 
more."  ^ 

The  seeming  absurdity  of  such  a  multiplicity  of  exac- 

^  For  a  somewhat  similar  characterization  of  the  tax  system 
of  the  United  States,  see  D.  A.  Wells,  Cobden  Club  Essays, 
secoivd  series,  p.  479. 


SINGLE  AND  MULTIPLE   TAX  SYSTEMS.  9$ 

tions,  no  less  than  a  true  perception  of  the  increased 
burden  such  a  number  of  taxes  imposes,  has  led  to 
various  proposals  for  a  simplification  and  a  unification 
of  taxes.  Vauban  (1633-1707)  proposed  in  the  reign  of 
Louis  XIV.  to  establish  a  tax  known  as  the  royal  tithe 
or  dime  royale  which,  while  it  was  not  to  supersede  all 
other  taxes  whatever,  was  intended  to  replace  an  harass- 
ing- multitude  of  fiscal  levies.  Again  at  a  later  period 
the  Physiocrats  projected  the  impot  unique  as  a  substitute 
for  the  vexatious  swarm  of  taxes  which  weighed  down 
the  French  taxpayer.  Both  Turgot  and  Mirabeau, 
however,  admitted  the  impossibility  of  abolishing  at  that 
time  all  other  taxes.  Recognize,  as  we  must,  the  theo- 
retical shortcomings  of  the  Physiocrats,  especially  in 
their  identification  of  the  material  surplus  of  extractive 
industry  with  the  only  source  of  taxation,  it  is  still  im- 
possible not  to  have  a  generous  sympathy  with  the  ra- 
tional principle  which  lay  at  the  basis  of  their  faith. 
Compared  with  the  administrative  pettifogging  and  the 
shortsighted  pedantry  which  marked  the  cumbrous  mass 
of  fiscal  anomalies  then  prevalent  in  France,  their  clear- 
cut  plans  and  sweeping  designs  for  financial  reorgani- 
zation have  the  broad  and  permanent  traces  of  political 
genius.  IH. experience  allowed  us  to  harbor  the  hope  of 
peoples  more  enlightened  and  of  governments  less  ex- 
travagant, a  single  tax  system  might  be  perhaps  realized. 
Such  a  project  to-day  is  an  Utopian  ideal,  but  a  capti- 
vating ideal  none  the  less. 

The  practical  difficulties  which  prevent  the  realization 
of  a  single  tax  system  are,  the  danger  of  gross  inequality 
in  the  distribution  of  taxes  under  such  a  regime,  the 
necessity  of  suiting  taxes  to  the  convenience  of  the  tax- 
payer, and  the  difficulties,  in  the  United  States  at  least, 
which  wpuld  attend  upon  the  disbursement  of  revenue 


96  TAX/iTlON :  ITS   PRACTICAL   EFFICIENCY. 

among-  different  governmental  units.  The  inequalities 
which  would  arise  if  all  taxes  were  levied  upon  articles 
of  consumption,  for  instance,  are  readily  imagined.  Peo- 
ple of  smaller  means  would  bear  more  than  their  pro- 
portionate share  of  the  general  burden.  Similarly,  if 
money  incomes  alone  were  taken  as  the  sole  basis  of 
taxation,  much  ability  to  contribute  to  public  needs 
would  escape.  No  matter  how  broad  the  basis  chosen, 
it  seems  certain  that  great  inequality  would  result  from 
any  single  tax  system.  While  viewed  abstractly,  there- 
fore, a  number  of  different  taxes  may  seem  an  unneces- 
sarily cumbrous  piece  of  financial  machinery,  yet  such  a 
number  of  taxes,  if  kept  within  due  bounds,  guarantees 
a  sort  of  compensatory  action  which,  if  it  does  not  secure 
perfect  equity,  at  least  prevents  the  grossest  inequality. 
The  second  cause  given  for  the  non-establishment  of  a 
single  tax  system  is  the  necessity  of  suiting  taxes  to  the 
convenience  of  the  taxpayer.  This  is  a  desideratum  pre- 
scribed by  considerations  of  securing  smooth  adminis- 
tration no  less  than  by  considerations  of  adequate  reve- 
nue. Roughly  speaking,  there  is  no  criterion  of  the 
convenience  which  a  tax  system  affords  the  taxpayers 
comparable  with  their  general  acquiescence  in  such  a 
system.  Such  acquiescence  may  be  dictated  by  motives 
of  inertia,  interest,  or  ignorance.  But  so  long  as  these 
continue  to  be  traits  of  human  character,  and  so  long 
as  we  confine  ourselves  to  viewing  things  as  they  are, 
rather  than  as  they  ought  to  be,  there  is  no  material 
error  in  saying  that  of  two  tax  systems  which  exact  sub- 
stantially the  same  amount  of  objective  wealth  from  a 
community,  that  which  is  the  more  popular  is  felt  to  im- 
pose the  lesser  burden.  Indeed  the  greater  satisfaction 
on  the  part  of  the  general  public  may  even  offset  what, 
objectively  viewed,  is  a  greater  real  burden  of  taxation. 


CONSTRUCTION  OF  A   TAX  SYSTEM.  97 

This  it  is  that  compels  modern  states  to  have  so  large 
a  recourse  to  what  are  termed  indirect  taxes — that  is  to 
say,  taxes  levied  in  general  upon  consumable  commodi- 
ties. These  taxes  normally  fall,  as  we  have  seen,  upon 
the  consumer.  They  stand  in  no  necessary  relation 
whatever  to  his  taxpaying  ability.  But  for  a  number  of 
reasons  shortly  to  be  given  they  are  in  the  eyes  of  the 
taxpayer  more  convenient  than  direct  taxes.  They  come 
in  the  disguise  of  the  prices  of  commodities,  which  the 
taxpayer  seems  to  regard  with  comparatively  little  aver- 
sion. In  taxation,  as  elsewhere,  "  people  like  to  be  hum- 
bugged." Even  aside  from  considerations  of  equitable 
distribution,  a  single  tax  system  would  impose  too  severe 
a  strain  upon  the  moral  nature  of  ordinary  humanity. 
The  amount  taken  from  the  individual's  income  by  taxa- 
tion is  so  considerable  in  the  aggregate  that,  however 
economical  and  reasonable  a  plan  might  seem,  which 
would  take  this  amount  once  for  all  in  a  lump  sum,  there 
is  absolutely  no  chance  of  securing  for  such  a  project  any- 
thing like  popular  approval.  The  taxpaying  multitude  is 
like  Issachar — "  a  strong  ass  crouching  down  between 
two  burdens,"  one  of  which  is  the  necessary  load  of  taxa- 
tion, and  the  other  the  unnecessary  encumbrance  im- 
posed by  their  ignorance  of  the  nature  of  taxation. 

The  third  reason  for  the  non-establishment  of  a  single 
tax  system  is  the  difficulty  which  under  our  form  of 
government  would  arise  in  the  allotment  of  revenue  be- 
tween the  federal  and  the  state  governments.  If  either 
were  exclusively  charged  with  the  collection  of  the  tax, 
the  other  would  soon  become  politically  dependent.  If 
each  continued  in  partial  independence  of  the  other  to 
raise  taxes,  it  is  difficult  to  see  how  a  single  tax  system 
could  be  steadily  maintained. 

Constructioa  of  a  Tax  System. — The  foregoing  con- 


pS  TAXATION:  ITS  PRACTICAL  EFFICIENCY. 

siderations  force  us  to  acknowledge  the  practical  neces- 
sity of  a  complex  or  multiple  tax  system  instead  of  a 
single  tax  system.  Resort  must  be  had  to  both  direct 
and  indirect  taxes.  It,  therefore,  becomes  necessary  to 
consider  the  respective  merits  and  defects  of  these  two 
kinds  of  taxes.  The  very  terms  have  been  used  at  vari- 
ous times  in  various  senses.  Nor  is  it  our  intention 
to  grope  longer  than  necessary  in  the  dialectical  bog  in 
which  their  meanings  have  been  obscured  or  buried.^ 
Originally  a  direct  tax  was  one  whose  real  burden  was 
borne  by  the  payer  in  the  first  instance,  j  -An  indirect 
tax  was  a  tax  which  the  payer  shifted  uporr  com?  one 
else,  i  This  was  essentially  the  sense  in  which  th^  Physio- 
crats employed  the  terms.  Unfort-mately  some  of  the 
Physiocratic  ideas  as  to  what  taxes  were  shifted  and  what 
taxes  were  not  shifted  proved  untenable.  Thus  it  hap- 
pened that,  while  the  old  terms  were  retained,  some  taxes 
which  was  originally  supposed  to  be  unshiftable  and 
therefore  direct  turned  out  to  be  shiftable  and  there- 
fore indirect.  Thereupon  a  more  cautious  distinction  was 
made.     John  Stuart  Mill  2  put  it  as  follows:    ''A  direct 

*  No  better  example  of  a  long-winded  contention  about  the 
proper  meaning  of  the  terms  "  direct  "  and  "  indirect  "  can  be 
cited  than  the  recent  arguments  before  the  Supreme  Court  in  the 
income  tax  cases.  The  term  "  direct  taxes  "  in  the  federal  Con- 
stitution was  supposed  to  have  a  specialized  and  technical 
r  eaning,  to  wit,  land-taxes  and  capitation  taxes  eo  no)mnc. 
History  was  ransacked  and  philology  tortured  to  make  the  term 
mean  something  else.  Whatever  other  effect  the  court's 
decision  may  have  had,  it  seems  to  have  brought  the  legal  defini- 
tion of  the  term  into  consonance  with  current  economic 
definitions,  athough  this  was  done  by  traversing  former  de- 
cisions which  had  intimated  strongly  that  only  taxes  imposed  on 
individuals  as  such,  and  land  as  such  (not  as  a  possible  or  prob- 
able source  of  income),  were  "'  direct  taxes  "  within  the  meaning 
of  the  Constitution.  For  a  discussion  of  the  various  uses  of  the 
terms  see  article  by  Dr.  Charles  J.  Bullock  in  Political  Science 
Quarterly,  Vol.  XIII.,  No.  3- 

*  Principles  of  Political  Economy,  Book  V.,  Ch.  3. 


CONSTRUCTION  OF  A   TAX  SYSTEM.  99 

tax  is  one  which  is  demanded  from  the  very  persons  who 
it  is  intended  or  desired  should  pay  it.  Indirect  taxes 
are  those  which  are  demanded  from  one  person  in  the 
expectation  and  intention  that  he  shall  indemnify  him- 
self at  the  expense  of  another."  Here  the  intention  or 
desire  of  the  legislator  is  made  the  determinant  factor  in 
decidingwhether  a  tax  is  direct  or  not.  Both  the  earlier 
and  the  later  criteria  used  to  distinguish  direct  from 
indirect  taxes  are  inadequate.  The  incidence  of  taxes  can- 
not always  be  nicely  and  certainly  predicted.  Besides, 
their  immediate  incidence  and  their  eventual  incidence 
may  be  different.  Hence  the  impossibility  of  making 
incidence  the  test  of  the  distinction.  The  intention 
of  the  legislator  as  regards  incidence,  even  if  the  inten- 
tion could  always  be  ascertained  or  presumed,  affords  a 
poor  basis  of  distinction.  The  motives  of  the  legislator 
in  enacting  tax  laws  are  complex.  The  probable  inci- 
dence of  the  tax  is  but  one  of  many  considerations  which 
influence  his  action  in  the  matter.  It  may  influence  him 
to  a  very  small  degree  or  to  no  degree  at  all.  It  there- 
fore seems  best  to  adopt  the  empirical  classification 
made  by  administrative  officers  and  the  general  public 
as  well,  and  to  classify  taxes  accordingly.  It  must  be 
admitted  that  administrative  and  popular  usage  in  dif- 
ferent countries  differs  in  certain  details.  It  seems  best, 
however,  to  note  such  differences,  and  to  treat  them  ac- 
cordingly when  dealing  with  taxation  in  the  concrete, 
rather  than  to  refine  upon  existing  definitions  or  add 
new  definitions  to  the  already  cumbrous  list.  Direct 
taxes  may  then  be  described  as  regularly  recurring  ex- 
actions made  upon  the  basis  of  existing  possessions  or 
occupations,  whose  collection  is  ordinarily  initiated  by 
the  treasury  officials  who  are  furnished  with  lists  of 
the    tax    objects    or    taxpayers.       Indirect    taxes    are 


100  T^X/tTlON:  ITS  PR/iCTlCAL  EFFICIENCY. 

irreg-ularly  recurrent  exactions  made  upon  the  basis  of 
new  acquisition,  purchase,  consumption,  or  use,  whose 
collection  is  primarily  occasioned  by  the  individuals  who 
thus  newly  produce,  acquire,  purchase,  consume,  or  en- 
joy certain  kinds  of  goods.)  (Hence  a  tax  on  existing 
property,  either  as  an  undiffer^itiated  whole  or  on  speci- 
fied parts  thereof,  or  a  tax  on  the  income  derived  there- 
from, or  from  pursuits  or  trades  of  some  time  standing, 
are  examples  of  direct  taxes.  iTaxes  on  the  importation 
of  goods,  or  on  the  manufacture  of  goods,  or  on  the 
occurrence  of  certain  specified  transactions,  such  as  the 
recording  of  deeds  or  the  inheritance  of  property,  are 
indirect  taxes.  Curtly  put,  direct  taxes  are  taxes  on 
outstanding  possessions;  indirect  taxes  are  taxes  on  new 
acquisitions. 

Properly  to  apprehend  their  respective  merits  and  de- 
fects it  is  necessary  to  consider  them  from  a  number  of 
standpoints.  These  standpoints  in  the  order  of  their  im- 
portance are:  (i)  the  financial  productiveness  of  the  two, 
(2)  their  industrial  consequences,  (3)  their  influence  on 
the  distribution  of  the  tax  burden,  and  (4)  their  political 
tendencies. 

Their  Financial  Productiveness. — The  relative  amount 
of  revenue  derived  from  these  two  classes  of  taxes 
respectively,  varies  from  one  nation  to  another.  In 
the  United  States  the  amount  derived  from  indirect 
taxes  is  less  than  the  aggregate  derived  from  direct 
taxes,  although  the  federal  government's  receipts  come 
almost  exclusively  from  the  first  source.  Of  all  na- 
tions Switzerland  derives  perhaps  the  greatest  propor- 
tion of  its  revenue  from  direct  taxes.  The  first  fact, 
however,  to  deserve  careful  attention  is  not  the  vari- 
able proportions  yielded  in  different  states  by  these 
two  kinds  of  taxes,  but  rather  the  universal  recourse 


THEIR  FINANCIAL  PRODUCTIl^ENESS.  lOi 

which  all  states  have  to  both  of  them.  Gladstone  once 
described  direct  and  indirect  taxes  as  two  sisters, — the 
offspring  of  Necessity  and  Invention, — "  differing  only  as 
sisters  may  differ, — the  one  being  more  free  and  open,  the 
other  somewhat  more  shy,  retiring,  and  insinuating  " ; 
and  frankly  confessed  that,  whether  from  "  a  lax  sense 
of  moral  obligation  or  not,"  he,  as  Chancellor  of  the 
Exchequer,  '*  thought  it  not  only  allowable  but  even  an 
act  of  duty  to  pay  his  addresses  to  them  both."  This 
universal  utilization  of  direct  and  indirect  taxes  goes 
to  show  the  necessity,  or  at  least  the  preponderating  con- 
venience, of  employing  them  both.  This  is  due  to  a 
number  of  causes,  one  of  them  being  the  very  consider- 
able amounts  annually  spent  by  governments.  We  are 
here  concerned,  however,  to  trace  only  the  reasons  why 
both  kinds  of  taxes  must  be  used  to  afford  adequate 
public  revenue.  Were  direct  taxes  alone  employed,  a 
large  part,  often  the  larger  part,  of  the  population  of  the 
state  would  escape  taxation  altogether,  except  in  so  far 
as  the  taxes  advanced  by  the  minority  were  shifted  upon 
the  rest  of  the  people.  To  some  extent  this  would  hap- 
pen, but  even  then  the  resources  of  the  many  would  not 
be  subjected  to  anything  like  their  normal  tax  bearing 
capacity.  It  is,  of  course,  theoretically  possible  to  im- 
pose direct  taxes  upon  even  the  poorest,  but  the  expense 
of  tax-collection  would  thereby  be  so  enormously  in- 
creased as  to  make  the  attempt  unjustifiable  from  a 
purely  fiscal  standpoint.  "  It  is  one  of  the  open  secrets 
of  finance  "  that  indirect  taxes  "  have  a  knack  for  levying 
on  the  small  resources  of  insignificant  persons  which 
direct  taxes  have  never  learned.  They  know  how  to 
coax  pennies  out  of  poor  people  whose  names  have  never 
been  on  the  tax-collector's  books.  But  they  are  very 
sly  and  have  at  command  a  thousand  successful   dis- 


I02  TAXATION:  ITS  PRACTICAL  EFFICIENCY. 

guises.  High  or  complicated  tariffs  afford  them  their 
most  frequent  and  abundant  opportunities.  Most  peo- 
ple have  very  short  thoughts,  which  do  not  extend  be- 
yond the  immediate  phenomena  of  direct  vision,  and  so 
do  not  recognize  the  hand  of  the  government  in  the  hi;-;h 
prices  charged  them  in  the  shops.  Few  of  us  taste  the 
tariff  in  our  sugar,  and  I  suppose  that  even  very  thought- 
ful topers  do  not  perceive  the  license  tax  in  their  whis- 
key." ^  This,  then,  is  the  first  reason  that  both  kinds 
of  taxes  are  employed,  namely,  to  reach  taxable  ability 
wherever  found. 

As  the  national  wealth  grows,  the  yield  from  taxes 
will  normally  increase,  and  thus  in  a  way  keep 
pace  with  the  expanding  needs  of  the  government. 
In  this  tendency  to  increase  there  are  some  important 
differences  between  direct  and  indirect  taxes.  The  au- 
tomatic growth  of  indirect  taxes  is  the  more  rapid  in 
ordinary  times,  and  their  shrinkage  is  likewise  more  vio- 
lent in  periods  of  disaster  and  crisis.  The  reason  for 
this  is  that  the  occasions  of  importation,  manufacture,  or 
purchase  which  give  rise  to  revenue  from  indirect  taxa- 
tion nmltiply  rapidly  in  times  of  prosperity,  and  decrease 
in  hard  times  even  more  markedly.  This  results  in  a 
rapid  and  an  automatic  growth  in  the  yield  from  indirect 
taxes  in  the  first  period,  and  in  a  marked  diminution  of 
such  receipts  when,  on  the  contrary,  production,  impor- 
tation, and  sales  fall  off  in  number  and  amount.  Direct 
taxes,  on  the  other  hand,  imply  some  estimate  of  the 
property  or  income  of  the  taxpayer.  Such  estimates 
cannot  be  rapidly  adjusted  to  changes  in  the  taxpayer's 
economic  status.  Estimates  of  income  may  be  made 
each  year,  it  is  true,  but  re-valuations  of  property  take 
place  much  less  often.  The  result  is  that  unless  the 
rate  of  taxation  be  raised,  the  increase  in  the  yield  from 

^Woodrow  Wilson,  Congressional  Government,  p.  132. 


THEIR  FINANCIAL  PRODUCTIVENESS.  103 

direct  taxes  is  much  more  tardy  than  when  changed  in- 
dustrial conditions  spontaneously  enlarge  the  volume 
of  indirect  taxes  and  reflect  themselves  in  augmented 
revenues.  On  the  other  hand,  if  the  growth  of  direct 
taxes  is  less  rapid,  it  is  steadier  and  less  subject  to 
shrinkage  in  times  of  need.^ 

There  is  one  further  consideration  worthy  of  note  in 
this  comparison.  That  is  the  relative  cost  of  collecting 
the  two  kinds  of  taxes.  This  refers,  of  course,  only  to 
the  expense  which  the  government  is  at  in  the  process  of 
collection.  It  does  not  take  account  of  the  attendant 
losses  inflicted  upon  the  taxpayer.  Here  the  advantage 
lies  generally  upon  the  side  of  direct  taxes.  The  average 
cost  of  collecting  taxes  runs  between  two  and  five  per 
cent,  of  their  total  yield.  Taking  a  broad  survey  of  the 
question,  the  average  cost  of  collecting  indirect  taxes 
approaches  the  upper  limit;  the  cost  of  collecting  direct 
taxes  lies  in  the  vicinity  of  the  lower  limit. ^  From  the 
standpoint  of  financial  productiveness  we  may  then  con- 

^  Good  examples  of  these  tendencies  are  cited  by  Leroy- 
Beaulieu,  Science  des  Finances,  I.,  p.  229  sq.  Thus  in  England, 
under  substantially  similar  conditions  at  the  two  different 
periods. 

The  income  tax  (direct)  yielded  between  1865  and  1879  an 
increase  of  14%. 

The  spirit  tax  (indirect)  yielded  between  1865  and  1879  an 
increase  of  24%. 

The  tendency  of  indirect  taxes  to  shrivel  in  times  of  depres- 
sion is  much  more  serious  than  Leroy-Beaulieu  represents  it. 
Thus  in  the  United  States  customs  duties  in  the  fiscal  year  '92-3 
yielded  $203,355,016;  in  '93-4,  $132,818,530.  Internal  revenue 
in  the  fiscal  year  '92-3.  yielded  $161,027,623;  in  '93-4,  $147,111,232. 

^  For  details  see  Leroy-Beaulieu,  Science  des  Finances,  I., 
270  sq.;  Ely,  Taxation  in  American  States  and  Cities,  p.  90 
sq.;  Bastable,  Public  Finance,  p.  104.  An  exact  statistical 
comparison  of  the  respective  costs  of  collection  is  very  diffi- 
cult. The  mutually  dependent  relations  of  the  various  adminis- 
trative bureaus,  and  the  apparent  variations  in  the  rate  of  cost 
when  the  total  receipts  rise  or  fall  below  normal  complicate  the 
problem  enormously. 


104  T/iXATlOhl:  ITS  PRACTICAL  EFFICIENCY. 

elude  that  both  direct  and  indirect  taxes  are  necessary 
to  reach  taxable  capacity  in  full  measure:  both  are  in- 
strumental in  providing  for  the  growing  wants  of  the 
state,  their  action  in  this  respect  being  compensatory 
to  a  certain  degree  in  that  indirect  taxes  have  the  greater 
rapidity,  and  direct  taxes  the  greater  stability  of  growth. 
And,  lastly,  it  is  worth  our  notice  that  direct  taxes  are  or- 
dinarily somewhat  cheaper  to  collect. 

Industrial  Effects.  —  Taxation  provides  the  public 
treasury  with  the  needed  funds.  This  is  its  primary 
function.  But  no  tax  system  can  be  judged  solely  by 
its  capability  to  furnish  the  requisite  revenue.  A  second 
question  must  always  bo  asked,  namely,  how  the  tax  sys- 
tem affects  the  national  income,  the  ultimate  source  of 
all  taxes.  It  is  possible  in  finance,  as  the  history  of 
the  later  Roman  Empire  shows,  to  kill  the  goose  that 
lays  the  golden  tgg.  In  one  sense  all  taxes  have  the 
same  immediate  efifect,  to  wit,  the  appropriation  of  a  part 
of  the  national  income  for  public  purposes.  Exorbitantly 
high  taxes  may  even  lessen  the  sources  whence  the  na- 
tional income  fllows.^  But  while  both  direct  taxes  and 
indirect  taxes  produce  this  efifect  of  reducing  the  amount 
of  wealth  individually  disposable,  indirect  taxes  not  in- 
frequently produce  ulterior  effects  upon  the  industry  of 
a  nation.  These  ulterior  efifects  result  largely  from  the 
manner  in  which  indirect  taxes  are  levied.  In  general 
the  effective  administration  of  a  system  of  indirect  taxes 
necessitates  certain  restrictions  upon  the  ordinary  free- 
dom of  industrial  enterprise.  For  example,  a  customs 
system  compels  a  government  to  limit  the  number  of 
ports  of  entry.  Thus  importations  are  frequently  made, 
not  at  the  place  most  convenient  for  buyer  and  seller, 
but  at  the  nearest  available  customs  office.     This  is  per- 

'  See  page  14. 


EFFECTS  UPON  DISTRIBUTION  OF  THE  TAX  BURDEN.   105 

haps  not  a  very  serious  restriction  upon  commercial 
freedom,  as  the  custom-houses  are  located  at  all  the 
great  natural  ports.  It  is  an  impediment,  nevertheless, 
to  economic  transportation.  Again,  the  indirect  taxes 
which  the  federal  government  levies  on  tobacco  and 
spirits  necessitate  in  those  industries  a  large  amount  of 
inspection,  espionage,  registration,  enforced  book-keep- 
ing, and  the  like,  which,  if  universalized,  would  be  found 
to  be  intolerably  oppressive.  And  while  it  would  be 
absurd  exclusively  to  attribute  the  tendency  toward  con- 
centration in  certain  industries,  to  indirect  taxation  levied 
on  their  products,  still  the  facilities  ofifered  to  large  deal- 
ers, perhaps  mainly  in  the  interest  of  economical  fiscal 
administration,  by  this  system  of  indirect  taxation,  go  to 
create  monopolies  or  to  intrench  them  more  strongly 
when  once  they  have  come  into  existence.^  The  in- 
direct cost  of  indirect  taxes  is  many  times  greater  than 
their  immediate  cost  of  collection.  To  what  extent  this 
is  true  of  various  kinds  of  indirect  taxes  we  shall  attempt 
to  show  later  on.  In  general  it  is  true  that  indirect  taxes 
have  an  ulterior  evil  effect,  restricting  industrial  enter- 
prise, hampering  trade,  and  thus  obstructing  in  part  the 
natural  growth  of  the  national  income. 

Effects  upon  the  Distribution  of  the  Tax  Burden, — 
It  is  not  sufficient  that  taxes  be  adequate  to  the  needs 
of  the  govenrment ;  they  ought  also  in  the  widest  sense 
of  the  term  to  be  as  little  onerous  as  may  be  to  the  tax- 
payers. Hence  they  ought  generally  to  be  apportioned 
according  to  the  abilities  of  the  taxpayers.  How  do 
direct  and  indirect  taxes  respectively  stand  this  test  of 
fairness  or  equity  ?  For  indirect  taxes  no  substantial 
claim    can    be    made    on    this    score.     Experience    has 

*  See  Ely,  Taxation  in  American  States  and  Cities,  p.  83  sq.; 
Cliffe  Leslie,  Cobden  Club  Essays,  second  series,  p.  189  sq. 


io6  T.-iXATlON :   ITS   PR/IC'llCAL   EFFICIENCY. 

demonstrated  pretty  conclusively  tliat  the  great  revenue- 
yielding  objects  are  not  articles  of  luxury  or  conven- 
ience, but  are  mainly  the  so-called  necessities,  staples  of 
practically  universal  use  or  consumption,  like  wool, 
sugar,  tea,  woven  goods,  and  tobacco.  There  are  great 
difficulties  in  making  any  very  considerable  discrimina- 
tion between  the  different  grades  of  these  staples  so  as  to 
impose  heavier  taxes  on  the  choicer  and  more  expensive 
kinds.  Thus  it  comes  about  that  when  the  taxes  on 
such  articles  have  become  a  normal  part  of  their  ex- 
penses of  production,  the  consumer  bears  the  tax.^  No 
one  pretends  that  a  tax  on  sugar,  for  example,  stands  in 
any  proportion  to  the  respective  al)ility  of  the  various 
consumers  of  sugar.  A  family  with  an  income  of  $5000 
does  not  consume  ten  times  as  much  sugar  as  a  family 
with  an  income  of  $500.  Hence  the  smaller  the  ability 
to  pay  taxes,  the  greater  is  the  weight  of  taxation  im- 
posed by  such  an  indirect  tax. 

Direct  taxes,  when  tried  by  this  test  of  equity,  are  not 
found  wanting  to  an  equal  degree,  though  they  by  no 
means  deserve  the  indiscriminate  commendation  so  often 
accorded  them.  By  themselves  direct  taxes  cannot  be 
said  to  "  realize  justice."  In  the  first  place  they  are  not 
universal;  they  are  levied  ordinarily  upon  only  a  small 
part  of  any  community.  In  the  second  place,  they  are 
frequently  shifted,  in  whole  or  in  part,  from  the  nominal 
payer  to  the  actual  user  of  the  property  taxed.  On  the 
other  hand,  it  must  be  admitted  that  direct  taxes  do 
more  nearly  approximate  the  ideal  of  fiscal  justice  than 
do  indirect  taxes.  They  are  proportioned  to  what  is 
supposed  to  be  the  taxpayer's  ability.  And  such  appor- 
tionments are,  roughly  speaking,  fairly  accurate.  More- 
over, direct  taxes  are  not  shifted  to  any  such  degree  as 

*  See  page  72. 


POLITICAL  EFFECTS.  107 

are  indirect  taxes.  Some  direct  taxes  are  practically  un- 
shiftable.^  To  this  extent  they  are,  when  viewed  alone, 
more  equitable  than  indirect  taxes.  The  gross  injustice 
of  a  system  based  wholly  or  mainly  on  indirect  taxes  is 
considerably  tempered  by  the  addition  of  direct  taxes, 
especially  if  these  be  unshiftable.  But  the  realization  of 
anything  beyond  a  rough  kind  of  equity  is  generally  be- 
yond the  power  of  the  practical  financier. 

Political  Effects. — The  last  test  to  which  these  two 
kinds  of  taxes  must  be  subjected  is  the  political 
test.  Which  is  the  more  efficient  in  educating  the  citi- 
zen to  understand  and  to  perform  his  duties  as  a  citizen  ? 
Which  is  the  better  calculated  to  maintain  the  stability 
and  unity  of  the  body  politic  ?  Here  as  elsewhere  the 
political  doctors  disagree.  "  If  all  taxes  were  direct," 
says  John  Stuart  IMill,^  "  taxation  would  be  much  more 
perceived  than  at  present;  and  there  would  be  a  se- 
curity, which  now  there  is  not,  for  economy  in  the  pub- 
lic expenditure."  This  seems  very  probable/  although 
where  direct  taxes  are  in  vogue  there  is  often  wasteful  and 
extravagant  expenditure,  as,  for  example,  in  our  muni- 
cipal governments  at  present.  Even  here  the  most  cor- 
rupt of  city  governments,  as  the  Tammany  regime  in 
New  York  City  shows,  have  appreciated  the  necessity  of 
a  low  tax  rate  to  keep  themselves  in  power.  So  that 
Mill's  contention  still  carries  weight.  On  the  other 
hand,  it  is  alleged  with   some  show  of  reason  that  a- 


'  See  page  77. 

'  Principles  of  Political  Economy,  Bk.  V.,  Ch.  VI.,  §  i. 

'  Leroy-Beaulieu's  attempt  to  minimize  the  importance  of 
this  fact  (Science  des  Finances,  I.,  p.  252)  by.  citing  the  case  of 
the  heavy  income  tax  in  England  during  the  Crimean  war  seems 
to  me  very  w^eak.  The  direct  taxes  were  increased  to  keep  pace 
with  increased  expenditure  already  necessitated  by  the  war. 
To  argue  that  they  did  not  pacify  the  war  spirit  is  not  at  all  ia 
point. 


I08  T/tXATlON:  ITS  PRACTICAL   EFFICIENCY. 

system  composed  entirdy  of  direct  taxes  would  lead  to 
the  repudiation  of  public  debts.  Our  commonwealths 
have  done  this  in  more  than  one  instance.^  It  is  cer- 
tainly a  grave  comment  upon  existing  methods  of  taxa- 
tion that  there  is  danger  in  letting  the  people  understand 
how  great  taxes  really  are,  for  fear  the  people  may 
smash  a  part  of  our  ordinary  financial  machinery.  A 
resort  to  an  exclusively  direct  system  of  taxation  might 
lead  to  greater  future  economy  in  expenditure,  and  at 
the  same  time  occasion  the  repudiation  of  engagements 
already  contracted.  To  the  administrator  the  unques- 
tionable advantage  attaching  to  indirect  taxes  is  their 
popularity.  The  maintenance  of  the  status  quo  may  be 
at  times  of  far  vaster  importance  than  rigid  govern- 
mental economy  or  the  promotion  of  a  more  widespread 
interest  in  politics.  While  it  is  difficult  to  forecast 
social  tendencies,  the  opinion  might  perhaps  be  reason- 
ably hazarded  that,  while  anything  like  the  remission  of 
most  existing  indirect  taxes  is  very  improbable,  '  demo- 
cratic finance  '  seems  to  be  moving  in  the  direction  of 
increased  direct  taxation.  Income  taxes  are  the  product 
of  the  nineteenth  century,  and  the  large  taxation  of  in- 
heritances points  in  the  same  direction. 

General  Conclusions  as  to  the  Construction  of  a 
Tax  System. — The  complex  nature  of  the  problem  of 
constructing  or  reconstructing  a  tax  system  even  in 
part  will  be  evident  when  one  bears  in  mind  the  many 
conflicting  advantages  and  disadvantages  of  direct  and 
indirect  taxes.  Besides  the  vague  general  principle  that 
both  are  necessary  in  present  conditions,  no  general  rule 
can  be  laid  down.  At  various  times  dififerent  considera- 
tions are  uppermost.     When  revenue  is  urgently  needed 

*Cf.  W.  A.  Scott,  Repudiation  of  State  Debts  in  the  United 
States. 


DIRECT  AND  INDIRECT  TAXES  IN  THE  UNITED  STATES.    109 

the  collateral  evil  effects  of  indirect  taxes  must  often  be 
endured.  When  revenues  are  abundant  and  public 
needs  less  pressing,  scope  is  afforded  for  securing 
greater  equity  in  taxation,  enlarged  freedom  in  indus- 
trial undertakings,  and  increased  interest  in  good  gov- 
ernment. The  application  of  the  general  principles  to 
concrete  situations  must  be  determined  by  the  practical 
financier. 

Direct  and  Indirect  Taxes  in  the  United  States. — The 
federal  government  derives  by  far  the  greater  part  of  its 
income  from  indirect  taxes.  The  main  sources  of  this 
revenue  are  (i)  customs  duties  levied  upon  imports, 
(2)  excises  or  internal  revenue  taxes  levied  mainly  upon 
the  production  of  spirits  and  tobacco,  and  (3)  postal 
receipts.  The  last  we  shall  treat  under  the  head  of 
income  derived  from  the  performance  of  services  by  the 
state.  The  tax  upon  the  national  banks  is  almost  the 
only  direct  tax  imposed  by  the  federal  government. 
This  is  of  minor  importance.^ 

The  commonwealths  and  the  local  governments,  on 
the  other  hand,  derive  almost  all  of  tb.eir  revenue  from 
direct  taxes.  Of  these  the  (i)  general  property  tax  and 
(2)  corporation  taxes  are  the  most  important.  Inherit- 
ance taxes  are  collected  by  some  of  the  commonwealths. 
The  causes  for  this  assignment  of  direct  taxes  to  the 
one  and  indirect  taxes  to  the  other  are  partly  legal 
and  partly  economic.  The  Constitution  of  the  United 
States  (Art.  I,  Sec.  10)  excludes  the  states  from  rais- 
ing revenue  by  means  of  customs  duties.  The  fed- 
eral  government   itself   is   prohibited   from   taxing   ex- 

'  The  recent  taxes  imposed  by  the  Act  of  June  13,  1898,  to 
raise  money  for  the  Spanish  war  are  not  covered  in  this  descrip- 
tion. So  long  as  their  permanence  is  doubtful,  it  seems  best  to 
omit  them  from  consideration  here.     See  Appendix  A. 


no  TAXATION:  ITS  PRACTICAL    EFFICILNCY. 

ports.  There  is,  however,  no  direct  legal  restriction 
to  forbid  tlie  states  from  resorting-  to  internal  revenne 
taxes  upon  articles  manufactured  within  the-  frisdiction. 
To  do  this,  however,  would  result  in  driving  these  indus- 
tries to  other  states  where  no  such  taxes  were  imposed, 
or  where,  if  imposed,  they  were  less  severe.  Nor  cin  a 
state  effectually  resort  to  taxation  upon  such  articles 
manufactured  elsewhere,  but  brought  for  consumption 
within  their  own  jurisdiction.  Such  attempts  would 
probably  be  adjudged  interference  with  mterstate  com- 
merce, whose  control  is  jealously  guarded  by  the 
federal  government  (U.  S.  Cons.,  Art.  I,  Sec.  8). 
Thus  the  states  and  the  local  governments  are  practi- 
cally restricted  to  direct  taxes.  On  the  other  hand, 
while  the  federal  government  has  the  power  of  collect- 
ing direct  taxes,  such  taxation  must  be  territorially  uni- 
form throughout  the  land  (U.  S.  Cons.,  Art.  I,  Sec.  8) ; 
and  must  also  be  apportioned  among  the  states  "  ac- 
cording to  their  respective  numbers "  (U.  S.  Cons,, 
Art.  I,  Sec.  2).  As  this  second  provision  would  so 
grossly  violate  all  considerations  of  an  equitable  distri- 
bution of  taxation,  inasnuich  as  the  aggregate  wealth 
of  the  older  sections  is  largely  in  excess  of  their  numeri- 
cal proportion  of  the  total  population,  the  federal  gov- 
ernment is  practically  restricted  to  indirect  taxes. 

The  next  part  of  this  work  will  be  devoted  to  the  con- 
sideration of  taxation  in  the  concrete,  beginning  with 
Direct  Taxes,  mainly  collected  by  the  states  and  local 
governments,  especially  the  general  property  tax  and 
corporation  taxes.  Thereafter  indirect  taxes,  mainly  col- 
lected by  the  federal  government,  particularly  customs 
and  the  internal  revenue,  will  be  reviewed.  Lastly,  we 
shall  glance  at  the  sul)ject  of  income  taxation  (direct), 
practically  unused  at  present  by  either  federal  or  state 
governments. 


CHAPTER  V. 
STATE   TAXATION  (MAINLY   DIRECT). 

History  of  the  General  Property  Tax.  — The  federal 
government,  as  explained  in  the  last  chapter,  has  pre- 
empted the  domain  of  indirect  taxation.  This  result  is 
due  partly  to  the  constitutional  inhibition  laid  upon  the 
commonwealths  forbidding  them  to  impose  duties  on 
imports,  partly  to  the  economic  necessity  under  which 
the  commonwealths  labor  of  abstaining  from  taxing  any 
productive  enterprise  "that  could  or  would  run  away'" 
to  another  jurisdiction  which  might  deal  with  it  more 
considerately.  The  consequence  is  that  our  state  and 
local  governments  are  forced  to  raise  nearly  all  of  their 
revenue  by  direct  taxes. 

By  far  the  greater  part  of  this  revenue  is  derived  from 
the  general  property  tax.  This  tax,  or,  more  properly, 
this  tax  system,  consists  in  raising  revenue  upon  a  valua- 
tion of  substantially  all  property  within  reach  of  the  tax- 
ing power.  The  rate  of  taxation  is  ordinarily"  uniform, 
irrespective  of  the  different  kinds  of  property  taxed  and 
without  regard  to  the  ownership  ^  thereof.      Notwith- 

'  "Never  tax  anything  that  would  be  of  value  to  the  state, 
that  could  or  would  run  away,  or  that  could  or  would  come  to 
you."  This  canon  of  taxation  is  contained  in  a  pamphlet  en- 
titled "The  Tax  Question"  (1873)  by  Mr.  Enoch  Ensley. 

*  In  some  states  personal  property  is  taxed  at  a  lower  rate 
than  real  e-tate. 

^  Frequently  the  property  of  ecclesiastical,  charitable,  and 
educational  institutions  is  exempt  from  taxation  ;  the  property 
of  the  state  and  of  the  United  States  always. 

Ill 


112  STATE   T.IX.iTION. 

Standing  the  endless  variety  in  the  details  of  the  tax 
systems  of  the  various  states,  the  underlying  theory  of 
taxation  embodied  in  the  general  property  tax  ^  is  every- 
where unmistakably  the  same.  The  system  assumes  that 
the  payment  of  taxes  is  the  duty  of  every  property  owner, 
that  the  value  of  the  owner's  total  property  is  the  index 
of  his  ability  to  contribute  to  the  i)ublic  treasury,  and 
that  this  measure  of  ability  can  with  measurable  ac- 
curacy be  ascertained — three  propositions  of  which  the 
last  two  contain  far  less  than  the  whole  truth. 

The  universal  prevalence  of  this  system  warrants  a 
word  of  explanation  with  regard  to  its  history.  In  early 
colonial  days  taxes  were  light  and  frequently  irregular 
in  occurrence.  The  general  treasurer  of  Rhode  Island 
in  1649  reported  that  "  he  had  received  nothing  and  had 
nothing  in  his  hands."  ^  The  town  clerk  of  Providence 
wrote  to  Sir  Henry  Vane :  "  Sir,  we  have  not  known 
what  an  excise  means.  We  have  almost  forgotten  what 
tythes  are ;  yea,  or  taxes,  either  to  church  or  common- 
wealth." The  expenses  of  the  colonial  governments 
were  frequently  met  by  the  sale  of  public  lands,  or 
by  their  rentals,  by  the  fines  and  fees  exacted  in 
the  courts,  and  not  infrequently  by  having  recourse 
to    such    questionable    shifts   as   public    lotteries    or   to 


'  The  name  of  a  tax,  it  must  always  be  borne  in  mind,  refers 
to  the  basis  of  its  exaction,  and  does  not  connote  a  discrete 
sonrce  of  income  or  fund  of  property.  All  taxes  take  the  prop- 
erty of  individuals.  This  is,  in  the  last  resort,  the  only  source 
of  taxation.  But  the  general  property  tax  levies  on  the  tax- 
payer upon  the  basis  of  the  capital  value  of  his  total  property: 
the  income  tax,  upon  the  basis  of  his  current  income:  indirect 
taxes,  upon  his  purchases  of  particular  commodities.  The  different 
taxes  may  be  compared  to  different  faucets  to  the  same  tank. 
They  may  all  draw  upon  the  reservoir  at  the  same  time.  For 
a  pood  explanation  of  the  relation  of  capital  and  income  see 
Hadley.  Economics,  p.  464. 

*  Ely,  Taxation  in  American  States  and  Cities,  p.  108. 


HISTORY  OF   THE   GENERAL   PROPERTY   TAX.        113 

such  unquestionable  frauds  as  issues  of  fiat  money. 
Oliver  Wolcott,  Secretary  of  the  Treasury,  made 
a  report  to  Congress  in  1796  of  the  tax  methods 
then  in  vogue  in  the  various  states.  In  this  document 
it  appears  that  some  of  the  states  had  already  adopted 
the  general  property  tax.^  The  majority,  however, 
enumerated  certain  specific  objects  ^  of  taxation,  such 
as  land,  slaves,  and  polls ;  and  assessed  these  objects 
not  at  their  value  in  money,  but  at  an  arbitrary 
valuation  which  listed  all  land  of  the  same  grade  at  so 
much  an  acre,  slaves  at  so  much  a  head,  and  so  forth. 
The  transition  to  a  tax  based  upon  the  total  value  of 
property  as  an  undifferentiated  whole  was  inevitable. 
For  wealth  grew  apace.  New  forms  of  property  multi- 
plied. Town  lots  became  more  valuable  than  equal 
areas  of  grazing  land.  The  ingenuity  of  the  legislator 
was  tortured  to  keep  the  swollen  legal  list  of  taxable 
objects  abreast  of  the  constantly  growing  complex 
which  comprised  the  community's  wealth.  Every  new 
kind  of  chattel  slipped  through  the  meshes  of  the  legal 
net  until,  in  one  state  after  another,  the  unequal  contest 
ended  in  the  adoption  of  an  omnibus  clause.  Instead 
of  naming  specific  taxable  objects  and  by  implication 
exempting  all  other  objects,  the  new  system  specified 
the  exemptions,  if  any,  and  taxed  everything  else.  This 
change,  necessary  as  it  proved,  was  not  the  outcome  of 
diversified  kinds  of  property  solely,  but  was  due  as  well 

^ "  Taxes  are  imposed  on  the  mass  of  property,  real  and  per- 
sonal, with  certain  exceptions,  in  the  states  of  Rhode  Island, 
New  York,  Delaware,  and  Maryland."  Wolcott's  Report. 
Annals  of  Congress,  1796-1797,  p.  2700. 

^  It  is  perhaps  questionable  whether  there  was  at  first  any 
very  radical  difference  in  the  basis  of  tax  apportionment  in  the 
various  states.  The  kinds  of  property  were  so  few  in  number 
and  so  comparatively  uniform  in  value  that  a  few  categories 
of  taxable  objects  practically  coincided  with  the  sum  total  of 
property. 


114  ST/ITE   TAXATION. 

to  the  growing  complexity  of  ownership  in  much  of  the 
property  of  these  expanding  communities.  The  eco- 
nomic complexion  of  our  early  colonial  settlements  was 
extremely  simple.  They  were  largely  agricultural  com- 
munities in  which  land  was  i)lentiful  and  to  be  had  for 
the  tilling.  We  should  be  inclined  to  smile  at  the 
scanty  inventory  of  chattels  possessed  by  the  ordinary 
colonial  households,  Init  what  they  had  was  their  own. 
They  had  to  work  hard  for  a  bare  subsistence,  but  they 
were  not,  at  least  at  the  beginning,  paying  interest  on 
mortgages.  Soon  certain  handicrafts  arose,  and  later 
still  manufactures  under  the  factory  system  sprang  up, 
especially  in  thriving  towns  and  cities.  Not  only  did 
wealth  increase  in  amount  and  in  kinds,  but  much  of  it 
was  employed  by  those  who  had  borrowed  it.  The 
'  loan  fund  '  of  available  capital  which  the  owners  were 
willing  to  lend  out  at  interest  began  to  assume  con- 
siderable dimensions.  Where  a  borrower,  therefore,  de- 
ducted from  the  value  of  his  property  the  amount  which 
he  owed,  it  was  thought  that  the  lender,  whose  equity 
was  in  the  form  of  a  note,  mortgage,  book-account,  or 
bill  of  exchange,  would  escape  taxation  unless  all  prop- 
erty evidenced  by  credit  paper  were  included  among 
taxable  objects.  So  it  came  about  that  all  property, 
personal  or  real,  was  made  subject  to  taxation,  and  or- 
dinarily at  the  same  uniform  rate. 

This  process  of  transforming  the  elementary  tax  sys- 
tem into  the  general  property  tax  may  be  best  traced  in 
some  of  our  central  states  where  the  transition  was  rapid 
and  comparatively  recent.  •  In  the  state  of  Ohio  ^  land 
was  originally  classed  in  three  grades,  and  every  hundred 
acres  of  the   same  grade   was   taxed  at  the  same   rate. 

*  Ely,  Taxation  in  American  States  and  Cities,  p.  135;  also 
p.  146  sq. 


y4DM.:NlSTR.'iTI0N  OF  THE  GENERAL  PROPERTY  TAX.     115 

Taxes  for  local  purposes  came  from  this  tax  on  land 
combined  with  a  poll-tax  and  taxes  on  specified  farm 
chattels,  each  at  an  arbitrary  valuation.^  The  tax  laws 
of  1825  and  1 83 1  mark  the  futile  attempt  to  enumerate 
the  new  kinds  of  wealth  which  had  begun  to  appear. 
Farm  land  was  differentiated  from  town  lots.  The  capi- 
tal of  merchants  and  brokers,  "  money  at  interest,  all  grist 
and  saw  mills,  all  manufactures  of  iron,  glass,  paper, 
clocks,  and  nails,  all  distilleries,  breweries,  tanneries,  all 
iron,  brass,  and  copper  foundries,"  were  expressly  in- 
cluded. When  the  state  constitution  was  revised  in 
1 85 1  this  procedure  of  encyclopedic  enumeration  was 
given  up,  and  what  was  practically  an  omnibus  clause  2 
was  inserted — a  clause  so  uncompromisingly  rigid  as  to 
specifically  include  the  bonds  of  the  state  ^  and  of  its 
local  governments  among  taxable  objects.  Ex  uno  disce 
omncs.  By  the  end  of  the  civil  war  the  general  property 
tax  had  become  practically  universal  in  our  common- 
wealths. 

Administration  of  the  General  Property  Tax.  —  The 
first  step  in  the  administration  of  this  tax  consists  in 
listing  the  community's  property.  Here  the  legal  dis- 
tinction between  real  estate  and  personal  estate  furnishes 
a  rough  basis  for  the  primary  subdivision  of  the  aggre- 
gate of  the  community's  taxable  wealth.  Real  estate 
ordinarily  includes  land  with  its  fixed  improvements, 
such    as    buildings.     In    computing    the    value    of    real 

*  All  horses,  for  example,  at  ^40  a  head. 

"  General  property  tax  laws  at  present  frequently  enumerate 
specific  kinds  of  property  which  are  to  be  listed  for  taxation, 
but  they  make  no  attempt  to  enumerate  the  various  industries 
whose  property  is  to  be  taxed. 

'  Governments  frequently  exempt  their  own  bonds  from  tax- 
ation, and  thus  secure  a  higher  purchase-price  for  them  than 
otherwise  could  be  obtained.  The  higher  price  makes  good  the 
loss  of  future  taxes  on  the  bonds. 


Il6  STATE    TAXATION. 

estate,  however,  deductions  are  not  generally  made  for 
mortgage  indebtedness  resting  thereon.  Thus  a  house 
worth  $20,000,  but  mortgaged  for  $5000,  might  stand  as- 
sessed jointly  with  the  mortgage  at  $25,000/  Personal 
estate  includes  all  property  not  classed  as  realty.  Thus 
chattels  such  as  live  stock,  raw  materials,  machinery,  and 
furniture  are  examples  of  personal  estate.  Property  the 
legal  title  to  which  is  evidenced  by  credit  paper  is  also 
classed  as  personalty.  It  is  worthy  of  notice  that  the  eco- 
nomic corpus  of  real  and  personal  property  is  frequently 
identical.  It  is  therefore  a  mistake  to  confound  the  legal 
title  of  property  with  its  economic  corpus  or  material 
embodiment.  Strictly  speaking,  a  mortgage  is  not 
property,  but  the  legal  title  to  a  part  of  the  property  on 
the  basis  of  which  the  mortgage  was  issued.  The  same 
is  true  of  notes,  bonds,  stocks,  and  bills  of  exchange.^ 

The  primary  listing  and  valuation  of  real  estate  is  or- 
dinarily intrusted  to  assessors,  whose  operations  are  con- 
fined to  the  smaller  political  subdivisions,  such  as  town- 
ships or  city  districts.  These  assessors  are  generally 
under  the  control  or  supervision  of  a  board  of  officials 
whose  jurisdiction  embraces  the  city  or  county.  The 
valuations  of  real  estate  in  the  smaller  areas  are  thus 
subject  to  review  and  correction,  so  that  the  basis  of 
estimate  is  made  approximately  the  same  for  the  larger 
area.  Within  that  area  (ordinarily  the  county)  the 
valuations  of  realty  are  relatively  fair.  Opportunity  is 
normally  afforded  to  any  one  who  may  feel  aggrieved  at 


'  In  Massachusetts,  Connecticut,  New  Jersey  and  Colorado 
mortgage  debts  are  not  taxed  when  the  real  estate  has  been  as- 
sessed without  deductions  for  such  debts. 

"  Even  government  bonds  are  substantially  nothing  more  or 
less  than  a  title  to  a  part  of  the  productive  property  of  the  state 
that  issues  them,  and  also  a  lien  upon  a  part  of  the  future  product 
of  the  state's  citizens. 


^DMINISTRATlOhl  OF  THE  GENERAL  PROPERTY  TAX.    117 

the  valuation  attached  to  his  property  to  appear  and 
state  his  case.  ReHef  may  be  afforded  where  a  clear 
case  of  unjust  valuation  is  made  out  by  the  com- 
plainant. When  the  various  counties  of  the  state  have 
completed  their  respective  tax  lists,  these  lists  are  fre- 
quently subject  to  review  by  a  State  Board  of  Equaliza- 
tion. The  object  of  this  tribunal  is  to  make  such  an 
equitable  adjustment  between  the  county  valuations  as 
the  supervisory  county  or  city  board  has  made  between 
their  respective  townships  or  city  districts.  The  per- 
sonal knowledge  of  local  conditions  which  makes  pos- 
sible an  equitable  readjustment  of  valuations  within  a 
city  or  a  county  renders  similar  work  on  the  part  of  the 
state  board  practically  impossible.  Thus,  while  within 
cities  or  counties  the  valuations  of  real  estate  are  rela- 
tively fair,  as  between  the  various  counties  of  the  state 
(or  as  between  the  various  townships  or  towns  when 
there  is  no  county  board  of  equalization),  these  valua- 
tions are  flagrantly  unjust.  In  one  section  real  estate 
is  returned  at  its  market  value,  in  another  at  twenty- 
five  per  cent,  thereof.  It  thus  happens  that  one  section 
may  pay  towards  state  purposes  twice  or  three  times  as 
much  as  its  equitable  share.  These  valuations  of  real 
estate  are  ordinarily  revised  and  corrected  only  after  in- 
tervals of  some  considerable  duration,  sometimes  but 
once  every  decade.  Thus,  although  a  relatively  fair  es- 
timate of  realty  is  originally  embodied  in  the  assessor's 
list,  its  fairness  is  likely  to  undergo  material  alteration 
before  the  next  revision,  some  property  rising  and  some 
falling  in  value  in  the  interim.^ 

The  attempt  is  generally  made  to  secure  a  complete 

^  In  New  Jersey  the  primary  assessment  of  real  estate  is 
made  frequently  by  the  owner,  and  its  value  is  annually  stated 
upon  the  tax  return.  Thus  a  yearly  valuation  of  real  estate  is 
effected,  though  at  the  risk  of  under-estimate  in  the  first  instance. 


i 


ll8  ST/1TH    TAXATION. 

list  of  personal  prop.Qrty  l^y  requiring  the  owners  thereof 
to  make  out  an  inventory  of  their  personal  estate  and 
to  affix  thereto  its  true  value.  This  "  disclosure,''  as  it 
is  humorously  called,  is  generally  svipported  upon  oath 
or  affirmation.  The  law  which  determines  the  place  at 
which  property  of  various  kinds  shall  be  taxed  varies 
from  state  to  state,  the  general  rule  being  that  realty  is 
taxable  where  it  is  situate,  and  personalty  at  the  resi- 
dence of  the  owner.i  In  this  self-assessment  of  per- 
sonalty opportunity  is  afforded  for  deduction  on  account 
of  debts  owing  by  the  taxpayer.  It  is  perhaps  needless 
to  say  that  this  deduction  is- made  with  unfailing  scru- 
pulousness, even  for  fictitious  debts  that  have  been 
specially — often  fraudulently — contracted  to  serve  this 
very  purpose.  In  general,  most  personal  property  is  not 
listed  at  all,  and  the  value  attached  to  that  listed  is  often 
absurdly  small.  The  same  equalizing  process  already 
described  with  reference  to  real  estate  is  frequently  ap- 
plied to  the  valuation  of  personalty.  The  aggregate 
valuation  of  real  and  personal  property  serves  as  the 
basis  upon  which  taxes  for  both  the  commonwealth  and 
the  local  governments  are  ordinarily  based.  The  actual 
collection  of  these  taxes  is  commonly  intrusted  to  the 
officers  of  the  smaller  governmental  units.  The  tax  col- 
lected is  sufficiently  large  to  cover  the  expenses  of  the 
local  unit  as  well  as  the  local  unit's  share  of  the  county 
and  state  taxes.  Remittance  is  duly  made  to  the  county 
and  state  treasuries  of  the  quotas  apportioned  to  the 
township  or  city  where  the  taxes  have  been  actually  col- 
lected.2 

'  See  Cooley,  The  Law  of  Taxation,  p.  369.  Some  states  tax 
chattels,  where  they  are  found,  and  other  personalty  (credits) 
at  the  residence  of  the  owner. 

''This  description  of  the  general  ])roperly  tax  must  be  under- 
stood to  be  a  general  description  of  the  typical  features  of  the 


DEFECTS    OF   THE   GENERAL   PROPERTf    TAX.      119 

Defects  of  the  General  Property  Ta::. — The  principles 

on  which  the  general  property  tax  is  based  are  that  prop- 
erty owners  only  should  pay  taxes;  that  the  aggregate 
wealth  of  each  owner  is  the  fairest  index  of  his  taxpaying 
ability;  and  that  this  index  can  be  approximately  ascer- 
tained. The  first  two  propositions  are  questionable;  the 
third  is  almost  always  untrue.  Accepting  as  we  do  the 
dictum  that  each  should  pay  taxes  according  to  his 
ability,  we  may  justly  question  the  assertion  that  the 
absence  of  property  indicates  total  inability  to  contribute 
to  the  needs  of  the  government.  Is  the  salaried  indi- 
vidual who  has  amassed  no  property,  having  saved 
nothing  out  of  his  entire  income,  unable  to  bear  any 
share  of  the  public  burdens  ?  It  may  be  inadvisable  on 
grounds  of  fiscal  expense  to  attempt  the  collection  of 
direct  taxes  from  those  who  possess  but  a  minimum  of 
goods,  but  this  procedure  is  dictated,  not  by  considera- 
tions of  equity,  but  on  grounds  of  economical  financial 
administration.  That  property  is  the  fairest  gauge  of 
taxpaying  ability  is  a  canon  whose  truth  depends  upon 
the  assumption  that  the  individual's  income  will  in  the 
long  run  be  proportioned  to  his  realized  wealth.  This 
may  be  approximately  true  in  the  long  run,  but  that 
there  are  numerous  exceptions  in  individual  cases  is  no- 
torious. That  a  relatively  fair  disclosure  of  the  total 
wealth  of  individuals  is  attainable  is  an  assertion  which 
the  facts  of  financial  history  abundantly  disprove.  It  is 
chiefly  on  this  last  ground  that  the  tax  on  general  prop- 


system,  but  not  equally  applicable  to  every  commonwealth. 
In  some  states  the  commonwealth  collects  the  tax  on  person- 
alty in  whole  or  part  and  remits  to  the  local  governments 
their  respective  shares.  In  New  Jersey  the  taxes  for  state 
purposes  are  raised  mainly  by  the  tax  on  corporations,  and 
without  recourse  to  a  state  tax  on  the  aggregate  of  realty  and 
personalty,  except:  for  education. 


120  STATE   TAXATION. 

erty  so  frequently  fails  to  secure  the  just  distribution  of 
the  tax  burden. 

First,  as  between  different  communities.  The  unfair- 
ness in  the  basis  of  taxation  for  state  purposes  has  al- 
ready been  explained.^  As  a  partial  mitigation  of  this 
inequality  it  may  be  urged  that  the  tax  levied  for  state 
purposes  is  commonly  light.  This  is  happily  true,  but  it 
does  not  afYect  the  principle  involved.  It  might  be  sup- 
posed that  the  overtaxed  sections  would  get  some  relief 
from  the  partial  transfer  of  their  property  to  the  more 
lightly  taxed  sections,  or  that  they  would  shift  their  taxes 
ultimately  by  a  diminished  rate  of  improvement  upon 
their  real  estate.  Individuals  might  thus  get  some  re- 
lief. It  is  well  known  that  the  rate  of  taxation  is  or- 
dinarily taken  into  account  by  those  who  are  deciding 
upon  the  location  of  an  industrial  enterprise.  But  the 
actual  fact  is  that  the  state  tax  is  a  variable  quantity,  nov/ 
higher,  now  lower ;  2  that  it  is  imposed  mainly  upon  real 
estate  from  which  the  tax  burden  is  with  difficulty 
shifted,  and  that  the  permanence  of  a  low  rate  in  an\  sec- 
tion is  not  assured.  So  that  the  probability  is  that  the 
extra  burden  is  borne  at  least  for  a  considerable  time 
by  the  overtaxed  section,  and  that  the  readjustment 
through  shifting  processes  is  slow  and  generally  incom- 
plete. 

More  serious  far  than  the  unfairness  between  sections 
is  that  between  individuals  whose  possessions  are  differ- 
ently constituted  of  real  and  personal  estate.  As  already 
indicated,  the  great  mass  of  personal  property  is  never 
taxed  at  all.  It  escapes  through  many  devices.  Omit- 
ting entirely  the  question  of  collusion  ^  between  the  tax- 

*  See  page  117. 

*  See  Hadley,  Economics,  p.  459. 

"I  know  personally  of  an  estate  which  cost  over  a  million 


DEFECTS   OF   THE  GENER/iL  PROPERTY    TAX.      12 1 

payers  and  the  assessors,  who  '  for  ways  that  are  dark ' 
are  certainly  '  pecuHar,'  personal  estate  dodges  taxa- 
tion by  some  of  the  following  methods: 

(a)  The  owner  makes  no  return  at  all.  Very  gen- 
erally the  assessors  first  proceed  to  list  real  estate,  and 
then  require  the  return  of  personal  property  to  be  made 
by  the  owner  of  the  realty.  If  the  owner  of  personalty 
owns  no  real  estate,  his  name  is  frequently  omitted  al- 
together from  the  tax  list. 

(b)  Some  personalty  is  purposely  stricken  from  the 
tax  list  by  the  assessors.  Stock  in  trade  is  often  un- 
touched by  local  assessors  who  fear  to  drive  business  to 
another  place. 

(c)  Much  personalty  is  never  listed  by  the  owners. 
Debts  due  from  persons  living  at  a  distance  are  very 
infrequently  disclosed.  Stocks  of  non-resident  corpora- 
tions are  seldom  returned  by  the  owner.  Mortgages  are 
not  often  uncovered  by  the  mortgagee. 

(d)  Personal  property  is  enormously  undervalued. 
All  doubts  of  the  solvency  or  financial  status  of  debtors 
are  resolved  by  the  taxpayer  in  his  own  favor. 

(e)  Vast  deductions  are  made  for  fictitious  debts. 
Frequently  when  taxes  fall  due  there  is  an  enormous 
nominal  conversion  of  property  into  forms  of  wealth 
that  are  by  law  exempted  from  taxation. 

The  extent  to  which  personal  property  escapes  taxa- 
tion may  be  estimated  by  comparing  the  amounts  of 
realty  and  personalty  returned  for  taxation  with  the  true 
valuation  thereof. 

The  last  Census  ^  shows  that  in  1890  the  real  estate  in 
the  United  States  returned  for  taxation  was  valued  at 

of  dollars  assessed  at  a  valuation  of  less  than  one  hundred 
thousand,  while  other  property  in  the  same  section  is  generally 
assessed  at  over  half  of  its  market  value. 

'  See  Abstract  of  the  Eleventh  Census,  p.  188  sq. 


122  STATE    TAXATION. 

18,956  millions  of  dollars  ami  the  personal  property  at 
6516  millions.     The  true  valuation  of  real  estate  in  1890 
the  Census  estimates  at  39,54^).  millions,  and  of  personal 
property  ai.  25,492  millions.     The  older  and  wealthier  a 
community  is,  the  greater  is  the  relative  amount  of  its 
personal  property.     We  should  expect,  therefore,  to  find 
in  the  larger  cities  personal  property  aggregating  more 
than  real  estate.     Just  the  reverse  is  the  case.     In  Xew 
York  City'   in   1893  real  estate  was  valued  at  362O  nu,- 
lions  of  dollars,  personal  property  at  411   millions.      In 
Brooklyn  in    1895   the   personal   property   returned   \\a- 
only  a  tritie  over  one  per  cent,  of  the  total   valuat  on. 
In  New  Jersey  in  1893  the  total  taxable  valuation  was 
768  millions,   of  which   realty  ccvnprised  651    nuilions.- 
Where    the    relative    amount    of    personal    property    is 
greatest  the  amount  disclosed  for  ^taxation  is  generally 
least.     This  is  due  in  part  to  the  fact  that  personal  prop- 
erty in  the  form  of  farm  chattels  is  readily  discoveral^lc, 
while   personal   property    evidenced   by    credit   paper    is 
generally  inaccessible  to  the  collector.     Nor  is  this  ten- 
dency for  personalty  to  escape  taxation  on  the  decrease. 
The  tendency  is  strongly  in  the  opposite  direction.     The 
most    stringent    laws    have    been    repeatedly    passed    to 
effect  the  disclosure  of  personal  estate,  but  in  vain.    The 
board  of  assessors  of  Boston  is  described  by  Mr.  Thomas 
G.  Shearman  as  being  an  honest  and  ab'.e  body,   '"  fa- 
natical believers  in  the  taxation  of  personal  property." 
and  ■■  armed  by  law  with  almost  despoLc  ]>)\vcr.5  of  valu- 
ation."   In  1889  the  whole- amount  of  taxable  personalty, 
exclusive  of  bank  stock,  which  they  could  dii^cover  was 
$39,000,000.      "  Being    dissatisfied    with    this    estimate, 
which  was  all  that  was  justified  by  any  facts  which  they 

'  See  Seligman.  Essay  in  Taxation,  p.  27  sq. 
*  Legislative  Documents  of  N.  J.,  1893. 


DEFECTS   OF   THE   GENERAL   PROPERTY   TAX.      123 

could  state,  they  proceeded  to  multiply  it  four  and  a  half 
times  by  a  mere  guess."  ^  Some  years  ago  there  was 
passed  in  Ohio  a  law  known  as  the  tax  inquisitor  law, 
or  more  commonly  as  "  the  blackmail  law."  This  em- 
powered individuals  who  would  disclose  their  neighbors' 
personal  property  on  which  taxes  had  been  due  but  not 
paid,  to  collect  the  back  taxes.  A  large  part  of  the  tax 
thus  collected  went  to  the  informer.  The  result  has 
been  that  some  wealthy  citizens  changed  their  legal 
residences  to  other  states.^  Some  states  have  sought 
to  uncover  personal  property  through  the  machinery 
of  oaths,  affidavits,  and  the  like.  The  eflFective- 
ness  of  such  laws  is  inconsiderable.  If  Jove  laughs  at 
lovers'  vows,  he  probably  guffaws  at  taxpayers'  oaths. 
Even  the  Psalmist's  hasty  allegation  of  universal  men- 
dacity needs  little  qualification  in  this  province  of 
finance.  Where  the  taxpayer's  conscience  is  tender  he 
finds  (as  one  has  put  it)  that  virtue  is  perforce  its  own 
reward.  This  phase  of  the  system  is  described  in  one 
tax  report  as  "  a  tax  upon  ignorance  and  honesty " ; 
and  in  another  report  we  are  told  that  "  the  payment  of 
the  tax  on  personalty  is  almost  as  voluntary  and  is  con- 
sidered in  pretty  much  the  same  light  as  donations  to 
the  neighborhood  church  or  Sunday-school."  ^ 

The  most  glaring  unfairness  occasioned  by  the  general 
property  tax  is  between  the  farmers  as  a  class  and  city 
residents.  The  farmers  pay  taxes  on  a  greater  part  of 
their  personal  property  than  do  the  urban  taxpayers. 
Whether  this  is  in  part  shifted  is  perhaps  an  open  ques- 
tion, but  the  onus  of  shifting  the  burden  is  upon  the 
agricultural  sections,  and  it  is  highly  probable  that  much 

*  Natural  Taxation,  p.  81. 

'  See     Ohio     Tax     Inquisitor     Law,     by     T.     N.     Carver: 
Economic  Studies,  Vol.  III.,  No.  3. 

*  See  Seligman,  Essays  on  Taxation,  p.  31  sq. 


124  STATE   TAXATION. 

of  the  unfair  burden  is  never  shifted  at  all.  A  piece  of 
unfairness  sometimes  involved  in  the  general  property  tax 
is  that  those  who  hold  their  property  unencumbered 
by  mortgages  pay  taxes  upon  their  entire  property. 
Those  whose  property,  on  the  contrary,  is  mortgaged 
sometimes  pay  taxes  only  on  the  unencumbered  part  of 
their  estate;  and  if  the  mortgagee  pays  any  tax  at  all 
upon  the  mortgage,  he  is  probably  more  honest  than 
most  of  his  class.  The  result  of  the  system  is  a  premium 
on  indel:)tedness  and  an  incentive  to  dishonesty. 

Transformation  of  the  General  Property  Tax. — In  the 
troubled  waters  of  commonwealth  finance  there  are  two 
rocks  of  offence.  Both  are  found  in  the  operation  of 
the  general  property  tax.  The  first  is  the  unfairness 
wrought  by  the  taxation  of  realty  for  state  purposes,  the 
second  is  the  injustice  resulting  from  the  futile  attempt 
of  local  governments  to  tax  personal  estate.  The  former 
produces  inequality  in  the  tax  burdens  of  different  locali- 
ties; the  latter,  inequality  in  the  tax  burdens  of  different 
classes  of  property  holders. 

The  remedy  for  the  first  evil  is  not  difficult  to  find. 
It  is  the  abolition  of  the  state  tax  on  real  estate.  The 
basis  of  assessment  upon  which  this  tax  is  now  imposed 
is  unfair  as  between  different  sections.  This  basis  of 
assessment  is  also  incapable  of  any  very  material  im- 
provement through  the  machinery  of  state  boards  of 
equalization.  If  the  temporary  retention  of  real  estate  as 
a  source  of  state  taxation  is  necessary,  as  it  may  well  be 
in  the  newer  commonwealths  where  agriculture  is  almost 
synonymous  with  industry,  an  apportioned  tax  might 
be  substituted  for  a  rated  tax.  That  is,  instead  of  im- 
posing a  uniform  rate  of  taxation  upon  the  valuations 
now  made  of  different  sections,  a  state  board  or  com- 
mission might  approximately  determine  the  respective 


TRANSFORMATION  OF  GENERAL  PROPERTY   TAX.    125 

taxable  ability  of  different  sections  of  the  state.  Upon 
these  sections  in  accordance  with  their  taxable  ability 
as  thus  ascertained  a  certain  sum  of  money  would  be 
raised  by  the  local  collectors.  In  most  of  our  states, 
however,  the  entire  abolition  of  commonwealth  taxation 
upon  real  estate  seems  feasible.  The  comparatively 
modest  budgets  of  the  commonwealths,  as  well  as  the 
torpid  growth  of  these  budgets,  will  permit  the  states  to 
forego  their  revenues  from  this  source.  And  conversely, 
the  enormous  aggregate  expenditure  of  local  govern- 
ments, as  well  as  its  rapid  expansion,  seems  to  warrant  the 
segregation  of  real  estate  for  purposes  of  local  taxation. 
The  growing  wants  of  local  governments  will  thus  have 
an  adequate  source  of  supply  in  the  growing  productive- 
ness of  real  estate,  especially  within  our  larger  cities  and 
towns.  Real  estate  is  visible  and  tangible,  and  thus  in- 
capable of  escaping  the  tax  collector.  Its  fair  valuation 
within  local  limits  is  perfectly  practicable  and  is  now  ap- 
proximately realized.  Under  the  present  system  of  the 
taxation  of  general  property  real  estate  pays  an  ever- 
increasing  percentage  of  city  taxes.  The  loss  occasioned 
to  local  governments,  therefore,  by  the  relinquishment  of 
local  taxes  on  personal  property  would  be  readily  re- 
couped by  a  slight  addition  to  the  burden  now  imposed 
on  real  estate.  Moreover,  the  collateral  advantages  of 
such  an  arrangement  would  largely  recompense  real 
estate  owners  for  the  small  additional  load  on  realty. 

For  purposes  of  fiscal  adequacy  it  seems  best  in  the 
taxation  of  real  property  to  make  no  deduction  for  mort- 
gage indebtedness,  or  indeed  for  indebtedness  of  any 
kind.  A  provision  of  this  kind  ought  perhaps  not  to 
be  imposed  at  once  and  without  warning,  for  fear  of 
prejudicing  vested  rights  and  of  disappointing  the  an- 
ticipations of  owners   whose   property  has   been   mort- 


126  STATE   TAXATION. 

gagged  under  the  expectation  of  tax  abatement  for  debts. 
It  might  safely  be  appHed,  however,  to  all  future  in- 
debtedness, and  to  all  debts  whatever  at  the  expiry  of 
a  stated  term.  No  abatement  for  indebtedness  will  in  the 
long  run  be  no  very  substantial  hardship  to  the  debtor. 
The  increase  in  the  amount  taxable  will  be  ofifset  by  a 
lower  rate  of  interest  on  his  loans,  while  the  greater 
amount  of  property  thus  brought  under  contribution 
(much  of  which  would  otherwise  escape  altogether)  will 
tend  to  lessen  his  tax  quota.^  Such  a  refusal  to  deduct 
for  debts  in  assessing  property  will  also  lessen  the  in- 
justice of  taxing  those  who  are  free  from  debt  at  a  higher 
rate  than  those  whose  encumbrances  are  large. 

Assuming  that  the  commonwealth  governments  im- 
pose no  taxes  on  real  estate,  it  is  inevitable  that  personal 
property  should  furnish  the  greater  part  of  state  rev- 
enues. The  reasons  for  such  a  policy  are  weighty.  Be- 
sides the  gain  in  equity  derived  from  relinquishing  real 
estate  to  the  local  governments,  the  needs  of  the  states 
can  be  adequately  met  by  taxing  personalty.  The  ad- 
ministrative apparatus,  moreover,  for  reaching  much 
personal  property  is  possessed  by  the  state  governments 
alone.  This  latter  fact  accounts  for  the  widespread 
adoption  by  our  states  of  special  machinery  for  taxing 
many  corporations,  such  as  railroads  and  banks.  The 
extent  and  power  of  some  of  these  corporations  have 
grown  to  such  a  degree  that  they  are  but  imperfectly 
amenable  to  the  tax  power  of  local  governments.      Tl;e 

^  Plehn,  Taxation  of  Mortgages  in  California  (Yale  Review, 
May  1899,)  demonstrates  that  the  rate  of  interest  on  mortgages 
in  that  state  has  equalled  the  market  rate  of  interest  plus  the  lax 
plus  the  cost  of  shifting  the  tax.  This  has  been  the  result 
under  a  law  which  taxed  the  owner  on  the  value  of  properly  less 
the  value  of  mortgage  indebtcdncs-s  thereon,  and  which  taxed  the 
mortgagee  on  the  value  of  the  debt.  "  The  borrower  is  worse  off 
than  he  would  be  if  the  mortgage  were  exempt,  and  the  mortgagor 


TRANSFORMATION  OF  GENERAL   PROPERTY   TAX.   127 

franchises  under  which  they  operate  are  ordinarily  con- 
ferred by  the  state  legislature.  Hence  it  seems  obvious 
that  much  personal  property  can  be  taxed  adequately 
only  by  state  officials.  Prof.  Seligman  ^  affirms  that 
"  at  present,  especially  in  industrial  communities,  the 
greater  part  of  the  personalty  in  the  hands  of  individuals 
consists  of  intangible  personalty,  mainly  of  corporate 
securities."  The  proposed  plan,  therefore,  provides 
for  the  taxation  not  merely  of  a  part  but  of  the 
greater  part  of  personal  property.  The  complex  ques- 
tions involved  in  such  special  taxation  are  too  many  to 
be  touched  upon  here.-  In  general  it  may  be  said  that 
allowance  is  or  ought  to  'be  made  for  the  local  taxes  on 
real  estate  paid  by  the  corporations  or  joint-stock  com- 
panies whose  personalty  is  taxed  by  the  state.  Moreover, 
the  principle  of  '  stoppage  at  the  source  '  ought  every- 
where to  be  adopted,  if  possible.  This  process  is  the 
deduction  of  taxes  from  dividends  or  profits  at  the  time 
and  place  they  are  declared  or  paid,  before  they  reach 
the  owner's  hands.  Both  on  grounds  of  adequacy  and  of 
economy  this  procedure  is  highly  advisable.  The  bases 
on  which  taxes  are  imposed  on  personal  property  are 
various.  The  stock  and  bonds  of  corporations  ought 
both  to  be  considered  as  the  joint  source  of  the  earnings 
of  the  personal  property  taxed.  Net  earnings,  including 
both  dividends  and  interest  on  bonded  indebtedness, 
constitute  the  fairest  theoretical  basis  for  imposing  these 
taxes.  But  gross  earnings  on  account  of  their  certainty 
give  perhaps  a  better  practical  basis.  Should  the  tax 
raised  by  the  state  exceed  its  own  needs,  the  remainder 

were  taxed  upon  the  assessed  value  of  the  property  without  any 
deduction." 

^  Essays  in  Taxation,  p.   136. 

"  For  a  full  discussion  of  the  matter  see  Seligman,  Essays  in 
Taxation,  Chaps.  VI,  VII,  VIII. 


128  sTj4Te  Taxation. 

may  be  apportioned  among  the  local  governmental 
units.^ 

State  taxation  of  personal  property  invested  in  cor- 
porations or  in  analogous  stock  companies,  like  express 
companies,  leaves  untouched  the  further  question  of  the 
taxation  of  the  remainder  of  personal  property  like  farm 
stock  or  stock  in  trade.  How  is  personalty  in  the  shape 
of  chattels  to  be  brought  under  contribution  as  well  as 
chattels  evidenced  by  credits  ?  Perhaps  the  best  solu- 
tion, as  it  is  certainly  the  easiest,  is  to  exempt  such 
chattels  from  taxation  altogether,  on  the  assumption 
that  processes  of  shifting  will  equalize  the  advantages 
attaching  to  different  species  of  personal  property. 

Besides  the  taxation  of  personal  property  many  of  our 
commonwealths  are  deriving  a  substantial  part  of  their 
revenue  from  taxing  inheritances.  Fifteen  states  tax 
collateral  2  inheritances;  four  states  have  passed  laws 
taxing  direct  inheritances.  The  latter  are  ordinarily 
taxed  at  a  lower  rate  than  the  former.  Barring  the  ir- 
regularity in  the  yield  of  such  taxes,  for  millionaire  mor- 
tality is  unpredictable,  the  tax  is  to  be  commended  as 
furnishing  ample  returns,  as  being  felt  but  slightly  by 

*  The  importance  of  state  taxes  on  personalty  may  be  in- 
stanced in  the  case  of  New  Jersey.  Here  for  the  year  ending 
Oct.  31,  1896,  of  the  total  net  receipts  amounting  to  $2,138,532, 
railroad  and  canal  corporations  paid  $1,079,687  and  miscel- 
laneous corporations  $707,951  additional.  Selignian,  Rssays 
in  Taxation,  pp.  176,  177,  gives  statistics  of  the  yield  of  state 
taxes  on   personal   property,   corporations,   etc. 

'  Collateral  inheritances  arc  such  as  descend  to  distant  relatives. 
The  laws  in  the  various  states  draw  an  arbitrary  limit  between 
direct  and  collateral  inheritances.  The  latter  are  generally 
taxed  at  five  per  cent,  of  the  total  value.  Sometimes  the  rate 
of  taxation  increases  with  the  amount  of  the  estate.  The  fed- 
eral government  imposed  a  war  tax  on  inheritances  by  the  law 
of  June  13,  1898.  Tlie  rate  of  taxation  rises  with  the  amount  of 
the  personal  estate.  See  Max  West,  The  Inheritance  Tax, 
Columbia  College  Studies,  Vol.  IV.,  p.  175  ^Q-  See  also  Ap- 
pendix A, 


TRANSFORMATION  OF  GENERAL   PROPERTY    TAX.   129 

the  payer,  and  as  justifiable  on  the  ground  of  special 
state  protection  involved  in  the  devolution  of  property. 
So  long  as  the  smaller  direct  inheritances  are  exempted, 
the  law  cannot  be  said  appreciably  to  weaken  the  motives 
prompting  to  the  acquisition  of  property.  The  yield  ^ 
of  the  tax  in  1894  was  as  follows: 

New  York $1,688,954 

Pennsylvania 869,179 

Massachusetts 239,368 

New  Jersey 204,695 

The  probable  form  of  state  and  local  taxation  in  this 
country  is  already  apparent.  "  State  revenues  will  be 
derived  almost  exclusively  from  corporaiion  taxes  and 
inheritance  taxes,  while  real  estate  will  be  relegated  to 
the  local  divisions."  ^ 

^  Seligman,  Essays  in  Taxation,  p.  134.  I  am  inclined  to 
dissent  from  Prof.  Seligman's  justification  of  inheritance  taxes. 
He  justifies  them  on  the  ground  that  they  are  fortuitous  income 
which  otherwise  would  not  contribute  to  pubHc  needs.  If  the 
former  owner  has  already  paid  taxes  on  his  property,  the  tax- 
ation of  his  heirs  is  taxing  the  same  property  twice  in  the  same 
year.  Moreover,  the  fact  that  inheritances  are  fortuitous  in- 
come to  the  inheritor  does  not  increase  the  social  income  in  the 
least. 

'^  Seligman,  Progressive  Taxation  in  Theory  and  Practice, 
p.  215. 


CHAPTER  VI. 
FEDERAL  TAXATION    (MAINLY  INDIRECT). 

THE    INTERNAL  REVENUE    SYSTEM. 

The  Establishment  of  the  Internal  Revenue  System. — 
The  political  acumen  of  the  framers  of  our  constitution 
is  nowhere  more  cogently  instanced  than  in  the  choice 
made  of  the  sources  of  federal  revenue  by  those  we  fondly 
canonize  as  "  the  Fathers."  Their  task  consisted  not 
only  in  wresting  the  grant  of  a  strong  central  power  for 
the  new  federal  government  from  the  reluctant  forces  of 
separatism,  but  in  disguising  the  burden  such  a  sov- 
ereignty, however  beneficent,  carried  in  its  train.  Ham- 
ilton's solution  of  the  difficulty  was  a  reliance  chiefly 
upon  indirect  taxes — customs  and  excises — for  the  sup- 
port of  the  new  government.  The  system  thus  in- 
augurated is  in  its  main  outlines  the  system  of  to-day. 
"  It  may,  therefore,  be  accounted  one  of  the  customary 
advantages  which  our  federal  government  possesses  over 
the  governments  of  the  states  that  it  has  almost  always, 
in  ordinary  times,  derived  its  entire  revenue  from  prompt 
and  facile  indirect  taxes,  whilst  the  states  have  had  to 
live  upon  the  tardy  and  begrudged  income  derivable 
from  a  direct  levy.  Since  we  have  had  to  support  two 
governments  it  has  been  wisely  resolved  to  let  us,  as 
long  as  possible,  feel  the  weight  of  only  one  of  them, — 
and  that  the  one  which  can  get  at  us  most  readily,  and,  at 

130 


EST/1BLISHMENT  OF  INTERNAL  REVENUE  SYSTEM.    131 

the  same  time,  be  most  easily  and  promptly  controlled  by 
our  votes.  It  is  a  plain,  convenient,  and,  on  the  whole, 
satisfactory  division  of  domain,  though  the  responsi- 
bility which  it  throws  on  state  legislatures  is  more  apt 
to  pinch  and  prove  vexatious  than  is  that  which  it  lays 
upon  Congress."  ^ 

The  origin  of  our  federal  system  of  finance  is  in  some 
ways  unique.  It  did  not  evolve  as  in  England  and  on 
the  continent  out  of  a  pre-existing  jumble  of  '  ill-defined 
prerogative  rights,'  of  market-fees,  tolls,  trade-licenses, 
and  royal  monopolies. ^  This  system  of  taxing  the 
manufacturer  of  certain  products  always  implies  a  thor- 
oughly developed  system  of  exchange  by  means  of 
which  the  producer  may  recoup  his  tax  loss  by  increas- 
ing the  price  charged  the  purchaser.  Such  a  system  of 
transfers  had  not  been  developed  throughout  the  length 
and  breadth  of  the  land  in  1789.  Produce  was  largely 
consumed  by  the  family  on  whose  farms  it  had  been 
raised,  and  in  many  of  the  early  agricultural  communi- 
ties barter  was  the  dominant  mode  of  exchange.  Some 
five  2  of  the  states,  it  is  true,  had  made  the  attempt  to 
raise  revenue  by  the  taxation  of  domestic  spirits.  But 
it  was  evidently  a  half-hearted  manoeuvre,  unpopular, 
costly,  and  soon  abandoned. 

As  the  revenue  derived  from  customs  duties  proved 
inadequate  to  meet  the  expenses  of  the  nascent  govern- 
ment, Hafnilton  insisted  with  greater  emphasis  upon 
excise  taxation.  Congress  with  considerable  reluctance 
acquiesced  in  his  proposal,  and  early  in  1791  **  imposed 

*Woodrow  Wilson,  Congressional  Government,  pp.  133,  134. 

*  Cf.  Bastable.  Public  Finance,  p.  470  sq. 

'  New  Hampshire,  Connecticut,  New  York,  New  Jersey,  and 
Pennsylvania.  Cf.  F.  C.  Howe,  Taxation  in  the  U.  S.  under 
the  Internal  Revenue  System,  p.  16. 

*  Act  of  March  3,  t-qi. 


132  FEDERAL    TAXATION. 

a  graduated  tax  ranging-  from  nine  to  twenty-five  cents 
per  gallon  upon  spirits  manufactured  from  home-grown 
materials.  Perhaps  no  financial  measure  of  the  great 
Secretary  was  in  its  nature  more  of  an  experiment  than 
this  one.  He  was  acquainted  with  the  financial  expe- 
dients of  other  governments.  He  knew  that  the  '  drink 
duties  '  were  relied  upon  in  Great  Britain  for  a  large 
part  of  the  national  revenue,  and  he  argued  that  such  a 
scheme  was  practicable  at  home.  Great  was  the  op- 
position, however,  which  the  law  called  forth.  The  rudi- 
mentary economic  development  of  the  newer  agricultural 
communities,  the  sectional  spirit  which  the  law  evoked, 
and  the  inefficient  and  often  corrupt  administration  of 
the  measure  itself  raised  against  it  a  storm  of  disappro- 
bation. What  was  then  the  West  was  particularly 
bitter  against  the  tax.  Corn  was  their  great  staple 
product,  and  its  cheap  transportation  was  then  possible 
only  when  the  corn  was  condensed  in  bulk  in  the  shape 
of  spirits.  In  these  regions  "  money  was  so  scarce  that 
barter  was  the  prevailing  means  of  exchange,  and  whis- 
key the  recognized  measure  of  value."  ^  Notwithstand- 
ing abatements  in  the  rates,  and  modifications  of  the  law 
intended  to  placate  these  sections,  the  tide  of  opposition 
grew  in  strength  until  finally  in  1794  the  federal  tax- 
collector  was  openly  defied  by  the  western  counties  of 
Pennsylvania,  which  rose  in  rebellion.  The  '  Whiskey 
Insurrection'  was  speedily  quelled,  and  that,  too,  with- 
out great  difificulty.  But  when  to  the  disappointing  re- 
turns of  the  tax  we  add  the  heavy  cost  of  its  collection — 
between  fifteen  and  twenty  per  cent,  of  the  total  yield — 
and  when  we  remember  also  the  cost  of  suppressing  the 
disorder,^   we  can  hardly  regard  the  excise  on  spirits 

*  F.  C.  Howe,  op.  cit.,  p.  22. 

*The  cost  of  suppressing  the  rebellion  was  about  $1,500,000 


ESTABLISHMENT  OF  INTERNAL  REVENUE  SYSTEM.     133 

as  a  financial  success.  On  the  other  hand,  it  must  in 
fairness  be  said  that  it  laid  the  foundation  for  what  has 
ultimately  proved  an  eminently  practical  financial  sys- 
tem. It  early  asserted  the  power  of  the  federal  govern- 
ment, and  thus  proved  a  valuable  object  lesson  to  the 
unruly.  Though  supplemented  by  taxes  on  other  ar- 
ticles such  as  tobacco  and  sugar,  as  well  as  by  a  direct 
tax,  the  system  of  internal  taxation  did  not  survive  the 
downfall  of  the  Federal  party;  and  after  Jefferson's 
election  in  1800  the  whole  system  was  swept  away,  and 
for  over  a  decade  customs  duties  supplied  the  federal 
treasury  with  the  revenue  it  required. 

The  financial  difficulties  of  the  United  States  during 
the  second  war  with  Great  Britain  illustrated  two  fa- 
miliar truths.  The  first  is  that  lenders  of  capital  will  no 
more  readily  lend  to  a  government  than  to  an  individual 
unless  they  see  the  government  making  a  manly  effort 
at  taxation  to  pay  the  interest  accruing.  The  war  of 
1812  was  undertaken  under  the  mistaken  idea  that  prac- 
tically all  the  extraordinary  expenses  of  the  struggle 
could  be  met  by  borrowing  rather  than  by  extra  taxation. 
By  1813  this  was  seen  to  be  a  delusion.  The  other  fact 
which  was  exemplified  was  the  familiar  one  that  a  party 
in  power  frequently  adopts  or  is  frequently  driven  to 
adopt  means  and  measures  which  it  may  have  execrated 
when  in  opposition.  '  Necessity '  is  frequently  the 
justification  of  the  practical  administrator,  as  well  as 
*  the  tyrant's  plea.'  Thus  it  happened  that  the  domi- 
nant party,  the  Democrats,  who  had  destroyed  Hamil- 
ton's scheme  of  internal  taxation,  were  led  to  create  a 
similar  system  of  their  own.  Under  the  guidance  of 
Gallatin,  Congress  reimposed  taxes  upon  the  manufac- 

at  aP'^Jine  when  the  total  income  of  the  federal  government  was 
about"  i^,  000, 000. 


134  FEDERAL    TAXATION. 

aire  of  spirits  as  early  as  i8i3.'  IJesides  this  impost, 
there  were  imposed  at  the  same  session  of  Congress 
stamp  duties,  an  excise  on  sugar  refining,  and  a  direct 
tax  upon  the  states.  The  stress  of  war  seems  to  have 
precluded  any  insurrectionary  expression  of  popular 
dissatisfaction  which  may  have  been  felt  at  the  rehabili- 
tation of  the  former  system  of  internal  taxation.  Re- 
peated disasters  in  the  field  compelled  Congress  at  the 
instigation  of  Secretary  Dallas,  the  successor  of  Gallatin, 
to  increase  the  rates  of  taxation,  and  to  impose  taxes 
upon  additional  manufactures.  Products  made  from 
iron,  paper,  leather,  and  tobacco  were  heavily  freighted 
with  revenue  charges,  while  the  direct  tax  was  dtjubled 
in  amount.  The  cessation  of  the  war  early  in  1815  re- 
duced the  government's  expenditure,  and  while  for  two 
years  longer  the  excise  system  continued  in  vogue,  it  was 
swept  completely  away  in  the  closing  days  of  18 17.2 
Thereafter  for  almost  forty-five  years  the  land  had  rest 
from  the  federal  exciseman.  Economy  in  public  ex- 
penditures was  the  rule,  and  customs  dues  again  became 
the  main  reliance  of  the  federal  treasury.  Prudence 
probably  would  have  dictated  another  policy.  The  re- 
tention of  moderate  duties  upon  certain  eligible  objects 
of  taxation,  such  as  spirits,  would  have  proved  but  a 
slight  burden  upon  the  country,  and  would  have  pre- 
served intact  the  necessary  fiscal  machinery  which  could 
quickly  be  run  at  higher  speed  whenever  war  became 
imminent.  The  best  contrived  tax  systems,  as  experi- 
ence demonstrates,  require  time  to  attain  their  normal 
efficiency.     The    creation    of    a    capable    administrative 

*  Acts  of  July  24  and  Aug.  2,  1813. 

'Taxes  received  after  1817  by  virtue  of  the  previou 
revenue  legislation  were  those  in  arrears  when  the  syi 
demolished  by  the  Act  of  Dec.  17,  1817. 


ESTABLlSHMEhIT  OF  INTERNA L  REVENUE  SYSTEM. 


T35 


staff  is  not  the  work  of  a  day,  though  when  a  nucleus 
of  experienced  officials  exists,  the  extension  of  such  a 
fiscal  arm  is  speedily  possible.  The  penalty  of  our 
hasty  policy  seemed,  however,  to  put  off  the  day  of  its 
coming;  and  not  until  we  found  ourselves  in  the  throes 
of  civil  war,  and  the  loan  policy  of  Secretary  Chase  had 
miserably  failed,  were  earnest  efforts  made  to  re-establish 
a  federal  system  of  internal  taxation. 

The  Act  of  July  i,  1862,  which  re-created  the  internal 
revenue  system  was  a  sweeping  measure.^  "  The  one 
necessity  of  the  situation,"  as  Mr.  Wells  2  puts  it,  "  was 
revenue,  and  to  obtain  it  speedily  and  in  large  amounts 
through  taxation,  the  only  principle  recognized — if  it 
can  be  called  a  principle — was  akin  to  that  recommended 
to  the  traditionary  Irishman  on  his  visit  to  Donnybrook 
Fair:  'Whenever  you  see  a  head,  hit  it.'  Whenever 
you  find  an  article,  a  product,  a  trade,  a  profession,  or  a 
source  of  income,  tax  it  !  "  Successive  acts  enlarged 
the  already  swollen  list  of  taxable  objects,  or  raised  the 
rates  of  taxation  previously  in  force.  Customs  duties 
were  increased  at  the  same  time,  partly  to  secure  addi- 
tional revenue,  and  partly  to  shield  from  unequal  foreign 
competition  the  domestic  producer  staggering  under 
heavy  excises.  It  was  not,  however,  until  1866  that  the 
efficiency  of  the  internal  revenue  system  reached  its 
maximum.    By  that  time  the  war  had  ended,  and  the  more 


'  "  To  show  the  general  scope  of  the  law.,  it  may  be  stated 
that  it  provided  taxation  upon  trades  and  occupations;  upon 
sales,  gross  receipts  and  dividends;  upon  incomes  of  indi- 
viduals, firms  and  corporations;  taxes  upon  specific  articles  not 
consumed  in  the  use;  stamp  duties;  taxes  upon  various  classes 
of  manufactures  as  well  as  taxation  upon  legacies,  distributive 

find    successions."      W.    Ford    in    Lalor's    Encyclopedia, 
rnal  Revenue. 


13^  FEDERAL   TAXATION. 

oppressive  war  taxes  were  bein£T  removed.  Within  three 
years  after  the  cessation  of  hostilities  the  only  remaining 
excises  of  any  importance  were  those  imposed  on  distilled 
spirits,  fermented  liquors,  cigars,  and  tobacco.  These 
articles  have  constituted  tiie  basis  of  the  internal  revenue 
system  from  that  day  to  this.  The  retention  of  a  federal 
system  of  excise  taxation  after  the  war  was  due  to  vari- 
ous causes.  The  vast  debt  contracted  during  the  struggle 
demanded  at  first  enormous  sums  to  defray  the  annual 
interest  charges.  The  Republican  party,  which  was  then 
in  the  ascendency,  was  the  legatee  of  the  excise  policy 
of  the  Federalists.  Lastly,  certain  manufacturing  in- 
terests which  had  grown  up  under  the  stimulus  of  pro- 
tective duties  protested  effectually  against  being  exposed 
to  foreign  competition.  So  it  happened  that  the  internal 
revenue  system,  instead  of  being  abolished  as  it  had  been 
in  1817,  was  simplified,  and  made  a  seemingly  perma- 
nent part  of  our  federal  system  of  finance. 

The  Tax  on  Spirits.  —The  fewness  of  the  articles 
upon  which  excise  taxes  until  1898  were  imposed  en- 
ables us  succinctly  to  describe  the  internal  revenue  sys- 
tem by  reviewing  the  respective  imposts  upon  these 
products.  For  the  fiscal  year  ending  June  30,  1897,  the 
aggregate  receipts  amounted  to  $146,619,508.  Of  this 
amount  over  eighty-two  millions  of  dollars  came  from 
the  tax  on  distilled  spirits,  while  fermented  liquors 
(mainly  beer  and  ale)  yielded  thirty-two  millions  more. 
The  tax  on  tobacco  contributed  almost  thirty-one  mil- 
lions additional.  TTence  almost  ninety-nine  per  cent.^ 
of  the  internal  revenue  was  until  lately  derived  from 
the  excises  on  drink  and  tobacco.  We  shall  discuss 
these  three  taxes  seriatim. 

'The  greater  part  of  tlu-  remaining  one  per  cent,  came  from 
the  tax  on  oleomargarine. 


THE  TAX  ON  SPIRITS.  137 

Fully  to  appreciate  the  effect  of  the  tax  laid  on  distilled 
spirits  it  is  necessary  first  of  all  to  grasp  the  circum- 
stances of  the  manufacture  and  use  of  such  spirits  prior 
to  the  Act  of  July  i,  1862.  Maize  or  Indian  corn  was 
grown  in  such  abundance  that  there  was  in  almost  every 
farming  section  a  disposable  surplus  which  readily  found 
its  way  to  the  local  still.  The  business  of  distillation 
was  entirely  free  from  anything  like  excise  taxation, 
and  instead  of  being  localized  at  a  few  centres,  was 
prosecuted  everywhere.  The  product  of  the  stills  was 
used  not  only  as  a  stimulant,  but  served  in  large  meas- 
ure as  the  raw  material  of  many  manufactures.  The 
fabrication  of  burning  fluid  (a  widely  used  illuminant, 
the  predecessor  of  kerosene)  absorbed  annually  some 
twenty-five  million  gallons  of  proof  spirits.  The  prepa- 
ration of  dyes,  varnishes,  patent  medicines,  imitation 
wines  and  vinegar  made  additional  inroads  into  the 
annual  supply  of  alcohol,^  so  that  of  the  estimated  annual 
product  of  ninety  million  gallons,  there  was  left  only  a 
part,  though  a  good  part,  for  individual  consumption  in 
the  shape  of  '  ardent  spirits.'  Nevertheless  the  price 
of  whiskey  was   uncommonly  low,   falling  in  August, 

1861,  in  the  Cincinnati  market  to  thirteen  cents  a  gallon, 
so  that,  as  has  been  remarked,  "  previous  to  i860  a  man 
could  undoubtedly  get  drunk  in  the  United  States  with  a 
less  expenditure  of  money  than  in  any  part  of  the  civil- 
ized world."  2 

Upon  this  Bacchic  Arcadia  the  tax-gatherer  *  came 
down  like  the  wolf  on  the  fold.'    The  Act  of  July   i, 

1862,  imposed  upon  distilled  spirits  a  tax  of  20  cents 
per  proof  gallon.^     This  was  raised  to  60  cents  by  the 

'Cf.  D.  A.  Wells,  Practical  Economics,  p.  156  j^. 

'  Op.  cit.  supra,  p.    163. 

'A  proof  gallon  consists  of  a  mixture  of  equal  parts  of  pure 


138  FEDERAL    TAXATION. 

Act  of  March  7,  1864,  and  to  $1.50,  and  finally  to  $2 
per  gallon  by  the  successive  Acts  of  June  30,  1864,  and 
Dec.  22,  1864.1  Besides  these  taxes  on  the  output, 
there  were  laid  imposts  on  the  processes  of  mixing  and 
compounding  spirits,  and  licenses  were  required  as  well 
for  selling  them  at  wholesale  as  at  retail. 

Under  the  combined  influence  of  speculation  resulting 
first  from  the  varying  fortunes  of  the  federal  arms,  and 
second  from  radical  and  unstable  tax  legislation,  all 
prices  jumped  up  and  down  as  though  excited  by  a  gal- 
vanic current.  The  price  of  distilled  spirits  and  of  al- 
cohol, their  chief  ingredient,  rose  so  high  that  its 
disuse  in  many  of  the  arts  was  widespread  and  speedy. 
Petroleum  luckily  furnished  a  substitute  for  burning 
fluid,  but  in  pharmacy  the  use  of  alcohol  was  curtailed 
about  fifty  per  cent. 

When  no  substitute  for  alcohol  was  to  be  had  the 
price  of  the  finished  product  reflected  the  increased  cost 
of  the  raw  material;  and  the  effect  of  the  higher  price 
was  to  diminish  the  ordinary  consumption.  A  decrease 
in  the  use  of  w^hiskey  as  a  stimulant  mig'ht  have  been 
viewed  from  one  standpoint  with  complacency.  But  it 
was  this  very  use  of  distilled  spirits  which  most  tena- 
ciously held  its  own.  Until  the  60-cent  rate  was  reached 
there  was  no  perceptible  decrease  in  the  use  of  whiskey 
for  drinking  purposes.-  Under  the  higher  rates  there 
was  noticed  a  decreased  use  in  the  rural  regions,  where 
beer  (the  price  of  which  had  not  been  correspondingly  en- 
hanced) began  to  be  consumed  in  greater  amount.     On 

alcohol  and  water.  The  American  standard  gallon  is  the  wine 
gallon,  which  contains  231  cubic  inches. 

'The  two  latter  Acts  taxed  spirits  distilled  from  grapes  at 
a  lower  rate.  Since  1S68  spirits  from  whatever  materials  dis- 
tilled have  been  taxed  at  the  same  rate. 

'  D.  A.  Wells,  Practical  Economics,  p.  180. 


THE   TAX  ON  SPIRITS.  139 

the  other  hand,  there  was  no  noticeable  diminution  in 
the  aggregate  consumption  in  the  larger  cities  where 
resort  was  had  to  the  debasement  of  the  quality  of  the 
liquor  in  order  to  keep  the  retail  price  from  advancing. 
From  a  sumptuary  aspect  the  net  effect  of  the  law  had 
been  to  compel  the  people  to  drink  practically  the  same 
amount  of  adulterated  liquor  rather  than  liquor  of  a  bet- 
ter quality. 

The  effect  of  the  tax  upon  the  national  revenues  makes 
a  somewhat  more  complicated  story.  In  i860  it  was 
estimated  that  the  annual  output  of  distilled  spirits  in 
the  United  States  was  90,000,000  gallons.  This  was 
before  any  tax  was  imposed.  After  the  introduction  of 
the  internal  revenue  system  the  annual  yield  of  the  tax, 
the  rate  of  taxation  per  gallon,  and  the  number  of  gal- 
lons annually  assessed  for  the  first  four  years  respect- 
ively are  as  follows: 

Fiscal  year  ending  June  30,  1863.  1864.  1865.  1866, 

Total  tax  yield  $5,176,530  $30,329,149  $18,731,422  $33,268,171 
Rate  per  gallon      20  cts.»  20  cts."  $1.50°  $2.00 

No.  gallons  re- 
turned (indi- 
cating total 
product) 16,149,950       85,295,391       16,936,778       14,599,209 

»  In  force  for  lo  months.  *>  To  March,  1864;  thereafter  60  cts. 

<=ToJan.  I,  1865;  thereafter  $2.00. 

This  table  requires  some  elucidation.  It  will  be 
noticed,  first,  that  the  total  amount  returned  for  taxa- 
tion, ostensibly  indicating  the  total  product,  was  always 
greatly  below  the  estimated  output  of  90,000,000  gallons 
in  i860;  secondly,  that  the  annual  product  varied  greatly 
from  year  to  year,  that  for  1864  being  apparently  over 
five  times  as  great  as  that  for  the  year  preceding ;  thirdly, 
that  the  relation  between  the  rate  of  taxation  and  the 
total  yield  of  taxation  seems  altogether    indeterminate. 


14©  FEDERAL    TAXATION. 

The  explanation  of  these  seeming  discrepancies  will 
shed  light  upon  some  of  the  most  striking  features  of 
the  tax  on  distilled  spirits.  The  small  product  disclosed 
m  1862-3  is  explained  by  the  rawness  of  an  inexperi- 
enced body  of  administrative  officials.  The  immense  in- 
crease in  the  amount  returned  the  following  year  was  due 
to  the  fact  that  the  Act  of  March  7,  1864  (which  raised 
the  tax  rate  per  gallon  from  20  to  60  cents)  did  not  apply 
to  stocks  on  hand  at  that  date.^  The  increase  in  the 
rate  of  taxation  and  the  necessary  rise  in  the  selling 
price  of  all  spirits  produced  after  the  higher  tax  rate  was 
to  be  in  force  were  both  foreseen.  The  distillers  con- 
sequently strained  every  nerve  to  augment  their  stocks 
before  the  advance  in  the  tax  rate  became  operative. 
Hence  the  enormous  amount  returned  for  taxation  in 
the  fiscal  year  1863-4,  The  failure  to  make  the  higher 
tax  rate  retroactive  put  millions  mto  the  pockets  of  the 
distillers.  At  this  point  another  element  begins  to  enter 
into  the  problem.  The  subsequent  advances  in  the  tax 
rate  to  $1.50,  and  finally  to  $2  a  gallon,  were  equiva- 
lent to  a  tax  of  almost  1000  per  cent,  upon  the  prime 
cost  of  manufacture.  If  the  producer  could  evade  the 
payment  of  the  tax  in  whole  or  part,  his  profits  were  in- 
creased many  fold.  The  abnormally  high  tax  rate  was 
equivalent  to  a  premium  on  dishonesty.  It  was  no 
longer  '  prosperous  to  be  just,'  and  most  of  the  whiskey 
interest  chose  to  be  prosperous.  By  far  the  greater  part 
of  the  whiskey  produced  for  a  time  was  never  returned 
for  taxation.  Thus  the  annual  output  which  paid  tax 
in  1865-6  was  less  than  fifteen  million  gallons,  and  in 
1867-8  fell  to  less  than  seven  million  gallons.  In  this 
way  it  came  about  that  the  excessively  high  rates  of 

*  Provided  the  20-ct.  tax  per  gallon  had  been  paid  or  bond 
piven  for  its  payment. 


THE  T/iX  ON  SPIRITS.  U* 

taxation  and  the  failure  to  make  these  rates  apply  to 
existing  stocks  promoted  dishonesty  and  evasion  on  the 
part  of  the  producers,  fraud  or  connivance  on  the  part 
of  many  revenue  officials,  venality  and  speculation  in 
Congress,  and  leanness  instead  of  plenty  in  the  federal 
treasury.  The  reduction  of  the  tax  to  50  cents  a  gallon 
in  1868  greatly  increased  the  revenue,  removed  much 
of  the  temptation  to  fraud,  and  aided  to  eradicate  tlie 
taint  of  corruption  which  had  almost  completely  per- 
meated this  entire  branch  of  the  revenue  service. 

The  most  convincing  proof  of  the  success,  both  moral 
and  fiscal,  of  the  abatement  of  the  tax  is  seen  in  the  fact 
that  during  the  first  four  years  during  which  the  50-cent 
rate  prevailed  the  average  revenue  realized  was 
$33,563,161,  against  an  average  annual  revenue  for  the 
four  years  preceding  (under  the  $1.50  and  $2  rates) 
of  $21,727,000.  The  average  annual  output  indicated 
by  these  collections  was  over  sixty-seven  million  gal- 
lons under  the  lower  tax,  and  less  than  nine  million 
gallons  under  the  higher  impost.  The  apparent  differ- 
ence in  output  indicates  the  enormous  extent  of  the 
fraud  perpetrated  upon  the  government  ;i — a  fraud  at 
some  times  so  palpable  that  the  wholesale  price  of  spirits 
would  not  cover  the  tax  and  the  cost  of  manufacture 
combined. 

The  Act  of  July  20,  1868,  which  reduced  the  tax  to 
50  cents  per  gallon,  imposed  certain  minor  taxes  gradu- 
ated according  to  the  capacity  of  stills  and  their  annual 
output,  so  that  the  aggregate  tax  per  gallon  was 
about  65  cents.  Besides  the  reduction  of  the  tax  rate  the 
technique  of  collection  was  improved  by  the  use  of 
adhesive  stamps  to  indicate  the  payment  of  spirit  taxes. 

^  The  history  of  the  tax  given  by  Mr.  Wells  has  become 
an  economic  classic.     Cf.  Practical  Economics,  p.  216. 


142  FEDERAL    TAXATION. 

This  at  once  made  the  g-cneral  public  an  auxiliary  rev- 
enue inspector,  and  served  to  identify  spirits  and  to  evi- 
dence their  satisfaction  of  the  tax  requirements.  But 
before  long  an  agitation  began  seeking  an  increase  in 
the  tax  rate  to  70  cents  per  gallcjn.  The  animus  of  this 
proposal  was  veiled  under  the  ostensible  purpose  of  con- 
solidating the  existing  major  and  minor  taxes  into  a 
single  equivalent  tax  on  the  product.  Accordingly  in 
1872  a  70-cent  tax  per  gallon  was  substituted  for  both 
taxes  previously  obtaining.  Again  in  1875  ^  the  rate 
was  raised  from  70  to  90  cents  a  gallon.  This  change 
exempted  existing  stocks  as  usual,  thus  giving  the  dis- 
tilling interest  and  interested  congressmen  another  sop. 
The  revenue,  however,  kept  fair  pace  with  the  tax,  and 
the  higher  rates  were  perhaps  as  honestly  collected  as 
the  50-cent  tax  had  been.  There  was  still  much  cor- 
ruption in  the  department  of  internal  revenue,  but  tl  e 
lower  rate  and  the  improved  methods  of  inspection  and 
collection  prevented  such  wholesale  fraud  as  reigned 
prior  to  1868. 

For  almost  twenty  years  the  tax  remained  at  90  cents 
a  gallon.  The  revenue  from  distilled  spirits  grew  rap- 
idly. The  increased  efficiency  and  honesty  of  the 
revenue  service,  and  the  change  in  the  condition  of  whis- 
key manufacture,  which  was  now  centralized  and  local- 
ized, made  the  tax  easy  to  collect.  In  1894  Congress, 
following  the  advice  of  the  Secretary  of  the  Treasury, 
increased  the  rate  to  $1.10  per  gallon.-  This  tax,  more- 
over, was  made  applicable  to  stocks  in  bond.^      Since 

^  These  two  Acts  raising  the  tax  per  gallon  are  dated  June  6, 
1872,  and  March  3,  1875,  respectively. 

'  Section  48  of  the  so-called  Wilson  Bill  of  1894. 

'  It  is  gratifying  to  note  that  for  the  first  time  the  change  in 
the  rate  was  made  retroactive,  and  this,  too,  in  spite  of  the 
alleged  attempt  of  the  Whiskey  Trust  to  bribe  Congress  to  ex- 
■snipt  slocks  on  Jiand.     Cf.  Shearman,  Natural  Taxation,  p.   17. 


THE   TAX  ON   TOBACCO.  143 

the  passage  of  the  Act  there  has  been  a  noticeable  fall  in 
the  revenue  yielded  by  the  tax  on  distilled  spirits.  The 
greater  part  of  the  loss  has  undoubtedly  been  caused  by 
the  widespread  industrial  depression  and  the  consequent 
shrinkage  in  the  use  of  spirits.  But  the  increase  in  the 
tax,  as  well  as  the  hard  times  themselves,  renders  the  in- 
centive to  dishonest  distillation  greater  than  before,  and 
discoveries  of  the  illicit  production  of  spirits  have  of  late 
markedly  multiplied. ^ 

The  excise  imposed  on  fermented  liquors,  such  as 
beer,  ale,  and  porter,  has  contributed  less  material  to  the 
criminal  literature  of  finance.  The  Act  of  July  i,  1862, 
imposed  a  uniform  tax  of  a  dollar  a  barrel.^  The  rate 
per  barrel  was  lowered  subsequently  to  60  cents,  but 
since  April  i,  1864,  the  first  rate  was  maintained  until 
1898,  although  a  deduction  of  7^  per  cent,  in  the 
purchase  of  the  revenue  stamps  used  for  this  purpose 
made  the  tax  really  amount  to  but  92^  cents  a  barrel. 
This  corresponds  to  an  ad  valorem  tax  of  about  twenty 
per  cent.,  and  was  not  high  enough  to  incite  to  fraud. 
Owing  to  the  surprising  growth  of  the  per  capita  con- 
sumption of  malt  liquors  the  yield  from  the  tax  upon 
fermented  spirits  steadily  grew  until  it  amounted  to  over 
thirty  million  dollars  annually.  The  steadiness  of  the  tax 
receipts  from  this  source  even  in  years  of  industrial  de- 
pression, and  the  comparatively  low  ad  valorem  rate  of 
taxation,  indicated  that  in  times  of  emergency  this  was 
one  of  our  most  promising  financial  resources.^ 

The   Tax  on   Tobacco. — ^The  third  and  last  great  con- 

*"The  average  number  of  stills  destroyed  since  the  Act  went 
into  effect  has  approximated  one  hundred  and  fifty  a  month." 
E.  C.  Howe,  Taxation  in  the  United  States  under  the  Internal 
Revenue  System,  p.  202. 

'  Thirty-one  gallons  is  the  maximum  capacity  of  a  barrel 
according  to  the  law. 

'See  Appendix  A. 


144  FEDER//L    TAXATION. 

tributor  to  the  internal  revenue  is  tobacco.  Upon  the 
use  of  '  the  weed,'  whether  by  smoking  or  chewing,  or 
in  the  form  of  '  the  good  old  gentlemanly  vice '  of 
taking  snuff,  the  federal  government  levies  toll.  The 
history  of  the  excise  on  tobacco  presents  few  features 
that  have  not  already  been  commented  upon  in  the  case 
of  spirits. 1  The  tax  on  tobacco  was  originally  impose, 1 
in  1862  under  the  pressing  need  of  revenue.  With  the 
intention  of  increasing  this  revenue  the  rates  of  taxation 
were  subsequently  raised.  As  such  advances  in  the  rate 
did  not  apply  to  existing  stocks,  the  rise  in  the  selling 
price  of  the  article  was  anticipated  by  the  accumulation  of 
enormous  supplies  far  in  excess  of  the  normal  demand. 
The  enrichment  of  producers  of  tobacco  would  have 
been  greater  had  not  the  deterioration  of  tobacco  with 
the  lapse  of  time  set  limits  to  the  stock  that  could  pru- 
dently be  carried.  The  revenue  from  tobacco  responded 
more  quickly  to  the  higher  tax  rates  than  had  been  the 
case  with  revenue  from  distilled  spirits.  Still  fraud  and 
evasion  were  rife,  and  the  returns,  though  increasing  in 
absolute  amount,  disappointed  the  expectations  of  the 
Treasury,  until  in  1868  the  use  of  adhesive  stamps  and 
the  substitution  of  specific  for  ad  valorem  duties  brought 
substantially  the  whole  tobacco  product  under  contribu- 
tion. Curiously  enough  the  trend  of  subsequent  legisla- 
tion has  been  towards  lowering  the  rates  of  taxation  on 
tobacco  instead  of  increasing  them  as  in  the  case  of  dis- 
tilled spirits.  From  1883  to  1898  cigars  were  uniformly 
taxed  at  $3  a  thousand  •?  and  in  1890  the  tax  on  smok- 
ing and  manufactured  tobacco  was  reduced  to  six  cents 
a  pound.     The  reason  for  this  action  was  the  existence 

^  Cf.  Quarterly  Journal  of  Economics,  Vol.  V.;  art.  on  The 
Tobacco  Tax  by  F.  L.  Omsted. 

'  Ordinary  cigarettes  were  taxed  fifty  cents  per  M.  See  Ap- 
pendix A. 


THE   TAX  ON  TOBACCO.  145 

of  surplus  revenue,  and  the  unwillingness  of  protected 
interests  to  permit  a  reduction  of  protective  duties.  The 
unique  features  of  the  tobacco  tax  in  the  United  States 
are  its  reliability  and  its  capacity  to  yield  additional 
revenue.  Whether  tobacco  be  classed  as  a  luxury  or 
as  a  necessity,  it  is  an  article  whose  consumption  is  ex- 
ceedingly steady.  "  A  tramp,"  says  Mr.  Smart.i  "  with 
6c?.  in  his  pockets  will  spend  2>d.  on  a  bed  in  a  lodging- 
house,  a  penny  on  bread,  and  2d,  on  tobacco."  This 
action  is  typical  of  the  users  of  tobacco  in  the  aggregate. 
While  customs  duties  shrivel  in  times  of  depression,^  the 
steady  yield  of  the  tobacco  tax  indicates  how  little  the 
consumption  of  tobacco  decreases  in  like  circumstances. 
And  when,  as  in  1883,  the  tax  on  tobacco  was  decreased 
almost  one  half,  the  notion  that  the  use  of  tobacco  would 
largely  increase  proved  empty.  The  total  consumption 
was  but  slightly  affected. 

Compared  with  other  countries  the  tax  levied  by  the 
United  States  on  tobacco  is  extremely  low,  the  per  capita 
tax  being  but  a  third  or  a  fourth  of  the  per  capita  tax  in 
Great  Britain  and  France  respectively ;  and  the  ad 
valorem  rates  on  manufactured  tobacco  in  this  country 
being  less  than  a  tenth  of  the  corresponding  rates  in 
Europe.  Tobacco,  like  beer,  seems  to  be  capable  of 
yielding  millions  of  additional  revenue  at  short  notice.^ 

'  Introduction  to  the  Tlieory  of  Value,  p.  23. 
'  As  illustrative  of  this  tendency  we  may  cite  the  following: 
Customs    in    1872,    $216,000,000;    tobacco    revenue,    $33,000,000 
"  "     1873,      188,000,000;  "  "  34,000,000 

"  "     1874,      163,000,000;  "  "  33,000,000 

'The  remaining  articles  taxed  under  the  internal  revenue 
laws  prior  to  the  Spanish  war  were  oleomargarine,  opium,  and 
playing-cards.  The  tax  on  the  first  mentioned  article  yields 
over  a  million  dollars  annually.  Its  taxation  is  due  to  the  out- 
cry of  the  agricultural  interest  and  is  essentially  a  protective 
measure,  contrived  in  the  interest  of  butter  producers  3.iid  3,%  tbf 
expense  of  the  qonsurper. 


146  FEDERAL    TAXATION. 

The  Canons  of  Excise  Taxation — An  ideal  tax  sys- 
tem must  so  far  as  possible  reconcile  and  harmonize  a 
number  of  independent  interests.  The  public  treasury- 
must  be  supplied  with  adequate  revenue.  This  revenue 
ought  to  be  exacted  with  the  minimum  interference  with 
all  that  makes  for  a  large  national  income.  The  appor- 
tionment of  taxes  ought  to  be  equitable  as  between  the 
contributors  ;  and  the  political  and  moral  sense  of  so- 
ciety ought  in  every  practicable  way  to  be  guarded,  or 
at  least  not  outraged,  by  the  state's  financial  system.  In 
a  previous  chapter  it  has  been  indicated  that  a  complete 
reconciliation  of  these  difYerent  interests  can  be  secured 
only  approximately.  Much  less  then  can  a  single 
branch  of  a  tax  system  be  supposed  to  completely  co- 
ordinate these  divergent  demands.  Still  in  case  of 
conflict,  adequacy  of  revenue  outranks  the  others,  and 
the  proper  order  of  subordination  has  already  been 
treated.^ 

Adequacy. — The  study  of  the  internal  revenue  sys- 
tem of  the  United  States  affords  conclusive  proof  of 
Swift's  dictum  that  "in  the  arithmetic  of  the  customs 
two  and  two,  instead  of  making  four,  make  sometimes 
only  one."  ^  The  highest  rates  on  distilled  spirits  pro- 
duced far  less  revenue  than  the  moderate  rates.  There 
is  no  more  certain  fact  than  that  ceteris  paribus  the  con- 
sumption of  an  article  will  decrease  if  its  selling  price  be 
advanced.  There  is  a  great  difference  in  the  degree  ac- 
cording to  which  the  use  of  various  articles  will  be  relin- 
quished under  the  influence  of  a  higher  price  which 
reflects  the  tax  as  an  item  in  the  increased  expenses  of  its 
production.  Only  observation  and  experiment  can  de- 
termine what  rates  of  taxation  any  traffic  will  bear.    But 

See  p.  92. 
'Quoted  jn  the  Wealth  of  Nations,  Bk.  V.,  Ch.  II, 


y4DEQU/iCY.  147 

too  high  or  too  low  a  rate  is  equally  fatal  if  the  fiscal 
quest  is  the  maximum  of  revenue. 

Experience  has  also  demonstrated  that  in  the  selection 
of  articles  for  excise  taxation  the  great  staple  articles  of 
popular  consumption,  comparatively  few  in  number, 
must  be  chosen.  Luxuries  even  when  taxed  at  the 
heaviest  rates  yield,  comparatively  speaking,  little  rev- 
enue. But  spirits,  tobacco,  tea,  coffee,  and  sugar  when 
taxed  yield  their  millions  and  tens  of  millions.  The 
difficulty  of  taxing  articles  of  luxury  is  that  such  articles 
must  be  taxed  on  the  basis  of  their  value.  If  different 
rates  are  assessed  on  articles  according  to  their  value, 
the  door  is  at  once  opened  throughout  entire  schedules 
to  wholesale  undervaluation  and  fraud.  These  dangers 
make  specific  rates  of  duty  preferable,  even  though-  the 
effect  of  such  rates  is  to  tax  alike  the  high-grade  and  the 
low-grade  article.  It  is  better  for  the  consumer  of 
moderate  means  to  pay  a  slightly  higher  percentage  tax 
on  the  articles  he  uses  than  to  be  mulcted  twice  to  make 
good  evasions  which  too  nice  a  regard  for  ideal  justice 
have  occasioned. 

Almost  equally  important  with  the  proper  choice  of 
the  rates  and  objects  of  excise  taxation  is  the  selection 
and  training  of  a  capable  administrative  staff  of  revenue 
officials.  Mr.  Howe  does  not  overestimate  the  funda- 
mental necessity  of  this  requisite  when  he  says: 
"  Probably  no  branch  of  our  national  administration 
has  suffered  so  much  from  the  spoils  system  as  has  the 
internal  revenue  service ;  for  in  no  department  of  the 
government  are  efficiency  and  honesty  so  essential  in  the 
employee."  ^  No  governmental  department  can  at  once 
attain  its  greatest  efficiency  under  the  spur  of  new  de- 

'  Taxation  in  the  United  States  under  the  Internal  Revenue 
System,  p.  195. 


148  FEDERAL    TAXATION. 

mands.  Time  is  essential.  But  given  a  nucleus  of 
trained  financial  specialists  with  certain  tenure  of  office 
during  good  behavior,  and  a  speedy  adjustment  to  new 
conditions  is  assured.  The  cost  of  collection  1  of  taxes 
depends  largely  upon  the  character  of  the  Treasury's 
civil  service.  Even  improved  methods  in  the  technique 
of  collection  are  largely  due  to  this  source. 

Viewed  as  a  whole,  the  internal  revenue  system  is  the 
most  satisfactory  part  of  our  entire  financial  structure, 
state  or  federal.  Its  returns  are  fairly  steady  and  reliable 
in  times  of  depression.  Its  growth  is  automatic.  It  is 
imposed  on  articles  the  demand  for  which  is  tolerably 
inelastic.  Its  burden  is  not  perceptibly  felt.  It  is 
honestly  and  economically  collected ;  and,  finally,  it  is 
abundantly  capable  of  yielding  additional  revenue  should 
an  unforeseen  emergency  arise. 

Eflfects  on  Industry. — The  seamy  side  of  excise  taxa- 
tion reveals  itself  in  its  interference  with  the  development 
of  industries  which  are  subject  to  such  taxation.  Under 
our  system  this  official  oversight  of  private  business  is 
practically  confined  to  such  industries  as  distilling, 
brewing,  and  tobacco  manufacturing.  Fortunately  no 
attempt  is  made  to  tax  the  raw  material  of  these  products 
while  it  is  in  the  hands  of  the  original  producer, — the 
farmer.  Such  taxation  would  involve  an  intolerable  ex- 
tension of  the  revenue  administration  and  an  equally  in- 
tolerable interference  with  agricultural  operations  at 
their  inception.  This  is  really  the  main  objection  to 
any  excise  tax  on  raw  material — that  it  necessitates  a 
widespread  and  v.^xatious  cramping  of  industry  at  its 
birth.     When  once  the  raw  material  is  in  the  hands  of 

.  *The  cost  of  collection  of  the  internal  revenue  is  less  than 
three  per  cent  of  the  total  yield.  It  was  about  2.70  in  the  fiscal 
year  1895-6. 


EFFECTS   ON  INDUSTRY.  149 

distiller,  brewer,  or  tobacco  manufacturer,  the  watch- 
ful supervision  of  the  revenue  department  begins.  The 
producers  are  required  to  give  bond  for  the  faithful  obser- 
vance of  the  law.  They  are  required  to  register  all  ma- 
terial bought  and  sold,  together  with  whatever  stock 
they  keep  on  hand.  A  particular  method  of  book-keep- 
ing and  often  monthly  reports  are  exacted  by  the  rev- 
enue officials,  who  also  assume  liberty  to  examine  the 
books  of  the  producer  at  any  time.  Such  interference, 
if  universal,  would  strangle  industry  in  the  tightening 
coils  of  red  tape  and  officialism.  Still,  long  continued 
usage  has  probably  made  this  species  of  state  interfer- 
ence tolerable. 

In  so  far  as  the  prices  of  these  products  are  competi- 
tive prices,  fixed  by  the  marginal  expenses  of  production, 
the  cost  involved  in  this  governmental  supervision  is  ulti- 
mately borne  by  the  consumer.  Nor  must  we  neglect  the 
possibility  that  these  expenses  of  production  are  higher 
than  they  might  otherwise  be  if  the  routine  processes  de- 
manded for  purposes  of  fiscal  convenience  had  not  para- 
lyzed much  inventiveness  which  else  had  trained  its 
genius  upon  devising  new  and  cheaper  processes.  It  is 
often  alleged  that  excises  tend  to  favor  the  large  pro- 
ducer at  the  expense  of  the  small  producer.  The  bond 
required  previous  to  starting  in  business  and  the  econo- 
mies secured  by  production  on  a  large  scale  are  both 
seemingly  favored  by  excise  taxation.  Some  such  in- 
fluence may  have  been  exerted  by  our  internal  revenue 
system.  But  the  trend  of  production  in  manufacture 
has  been  towards  production  on  a  large  scale,  and  distil- 
ling and  tobacco  manufacture  have  proved  no  exceptions 
to  the  general  rule.  Moreover,  the  prices  of  these  prod- 
ucts are  by  no  means  wholly  competitive  prices,  so  that 
it  is  not  easy  to  determine  how  greatly,  if  at  all,  their 


150  FEDERAL    TAXATION. 

selling  price  has  been  indirectly  affected  by  the  inter- 
ference caused  by  the  revenue  officials'  supervision  and 
inspection.  Lastly,  when  we  note  that  the  raison  d'etre 
of  production  on  a  large  scale  is  the  decreased  cost  of 
production  thereby  effected,  it  is  very  doubtful  whether 
old-fashioned  and  expensive  processes  have  been  kept  in 
vogue  even  indirectly  by  our  internal  revenue  system. 
The  practical  effect  of  this  system  has  been  to  make  the 
federal  government  the  biggest  partner,  though  a  silent 
partner,  in  these  industries,  and  to  raise  abundant  rev- 
enue without  inquisitorially  encroaching  upon  the  sphere 
of  general  industry. 

Effects  on  Public  Morality.  —  Excise  taxation  has 
been  advocated  frequently  as  likely  to  reform  public 
morals  or  to  abate  public  vices.  The  would-be  reformer 
is  apt  to  imagine  that  he  has  discovered  '  a  nice,  easy, 
original  plan  of  social  salvation  '  in  an  impossibly  exor- 
bitant tax  on  intoxicating  liquors.  Unfortunately  this 
is  not  the  fact.  Such  a  tax  is  unlikely  to  produce  any 
permanent  diminution  in  the  quantity  of  liquor  drunk. ^ 
It  is  almost  certain  to  debase  the  quality  of  the  liquor, 
and  to  engender  enormous  frauds  by  reason  of  dishonest 
attempts  to  evade  the  tax.  Indeed  about  the  only  favor- 
able moral  influence  that  an  excise  can  exert  is  the  nega- 
tive influence  of  not  tempting  taxpayers  or  tax-collectors 
above  that  they  are  able.  It  is  a  false  and  cynical  axiom 
that  every  man  has  his  price,  but  most  persons'  integrity 
is  more  or  less  elastic,  and  like  the  Yankee  of  the  story, 

*  "  . . .  .the  whole  evidence  from  the  experience  of  the  United 
States  is,  that  if  the  great  and  rapid  increase  in  the  price  of  dis- 
tilled spirits  of  the  year  1863,  through  federal  taxation,  did  for 
a  time  and  to  some  extent  operate  to  diminish  their  popular 
consumption,  the  effect  was  but  temporary."  D.  A.  Wells,  Prac- 
tical Economics,  p.  183. 


THE  BURDEN  OF  INTERNAL   REVENUE   TAXES.      151 

while  they  would  refuse  to  "  lie  for  a  ninepence  "  (the 
New  England  eighth  of  a  dollar),  they  "  wouki  tell  eight 
of  'em  for  a  dollar."  Fiscal  adequacy  and  the  conserva- 
tion of  morals  are  both  subserved  by  moderate  rates  of 
taxation. 

The  Burden  of  Internal  Revenue  Taxes.  —  The 
burden  of  the  internal  revenue  tax  would  ultimately  fall 
entirely  upon  the  consumer  if  the  pi-ices  charged  for 
liquor  and  tobacco  were  purely  competitive.  In  case 
these  products  were  closely  monopolized,  a  tax  like  our 
internal  revenue  would  be  borne  in  part  by  the  producer 
and  in  part  by  the  consumer.^  But  the  fact  is  that 
liquor  and  tobacco,  while  in  part  monopoly  products,  are 
not  so  altogether.  Even  our  most  sweeping  monopolies 
feel  the  force  of  residual  competition.  Hence  the  diffi- 
culty of  locating  with  assurance  the  incidence  of  our  in- 
ternal revenue.  It  seems  probable  that  the  incidence  is 
divided  between  producer  and  consumer,  though  the 
problem  is  a  complex  one.2  The  truth  seems  to  be  that 
retail  prices  of  such  articles  as  liquor  and  tobacco  are 
fairly  stable.  When,  therefore,  the  producer  finds  his 
profits  shrink  he  throws  the  tax  in  part  upon  the  con- 
sumer by  debasing  the  quality  of  the  product  rather  than 
by  increasing  its  retail  price.  But  this  very  resort  to  de- 
basement implies  a  pressure  upon  these  producers  which 
they  can  thus  shift  in  part  without  suffering  materially 
from  the  competition  of  other  producers  who  are  in 
substantially  the  same  position.  The  chances  therefore 
are  that  the  burden  of  our  excises  is  distributed  between 

*  Cf    the  general  treatment  of  the  incidence  in  taxation   in 

'  Cf.  Howe,  Taxation  in  the  United  States  under  the  Internal 
Revenue  System,  pp.  165,  166,  and  254  sq.,  where  the  view  is 
taken  that  the  producer  bears  at  least  a  part  of  the  tax. 


15*  FEDERAL    TAXATION. 

producer  and  consumer;  and  that  the  advantages  and 
disadvantages  which  the  consumer  in  the  first  instance 
experiences  are  largely  those  of  a  difference  in  the  quality 
of  the  goods  consumed  rather  than  in  variations  in  the 
retail  price  he  pays. 


CHAPTER  VII. 

CUSTOMS  DUTIES. 

The  Two-fold  Uses  of  Customs  Duties.  —  The  federal 
income,  as  was  incidentally  remarked  in  the  preceding 
chapter,  springs  mainly  from  the  taxes  levied  on  certain 
domestic  manufactures,  and  from  duties  imposed  upon 
goods  and  merchandise  brought  within  our  customs 
frontier.  It  is  the  revenue  which  accrues  from  these 
latter  that  will  next  demand  our  attention.  These 
customs  receipts  unfortunately  do  not  readily  lend 
themselves  to  a  perfectly  colorless  and  dispassionate 
scrutiny.  Interlacing  this  part  of  the  financial  fabric 
are  to  be  found  strands  of  an  industrial  policy  which 
has  excited  and  which  still  excites  endless  contro- 
versy. In  other  words,  the  taxes  which  are  imposed 
upon  imported  commodities  are  in  the  main  designed 
either  to  raise  money  for  the  Treasury  or  to  protect  cer- 
tain domestic  industries,  and  between  these  two  ends 
there  is  no  '  pre-established  harmony.'  It  would  in- 
deed be  an  unfair  presentation  of  the  case  to  assert  that 
a  tariff  of  duties  whose  primary  aim  is  protection  is  in- 
capable of  raising,  together  with  the  internal  revenue, 
sui^cient  money  for  the  economical  administration  of 
the  federal  government.  Such  a  statement  of  the  case 
would  be  as  misleading  as  the  opposite  contention  that 
a  revenue  tariff  is  necessarily  synonymous  with  a  deficit 
But  the  position  can  hardly  be  assailed  that   a  tariff  which 

153 


154  CUSTOMS  huriF.s. 

was  exclusively  desif^ned  for  purposes  of  raising  revenue 
would  be  built  on  very  different  lines  from  a  tariff  whose 
primary  aim  was  to  afford  to  domestic  industries  a  shel- 
ter from  forei.q'n  competition.  It  is  just  here  that  the 
difficulty  arises  in  treating  customs  duties  from  a  finan- 
cial standpoint  exclusively.  The  financial  interest  and 
the  industrial  interest  (assuming  that  the  latter  is  to  be 
subserved  by  a  protective  polic})  are,  if  not  hopelessh; 
divergent,  at  least  in  the  first  instance,  by  no  means  in 
complete  accord;  and  whether  the  public  is  benefited 
the  more  by  making  one  interest  subservient  to  the  other, 
or  by  striking  a  rough  compromise  between  tl:e  two,  is 
a  question  of  practical  policy  which  cannot  be  decided 
on  financial  grounds  alone.  Upon  the  issue  of  protec- 
tion itself  it  is  hardly  safe  to  assume  that  there  will  be 
any  general  agreement  for  many  years  to  come.  But 
there  is  little  ground  for  del)ate  upon  the  lesser  issue 
that  there  is  no  necessary  connection  between  the 
revenue  yielded  by  a  tariff  which  accords  the  desired 
degree  of  protection,  and  the  revenue  which  a  tariff 
is  capable  of  yielding  if  constructed  exclusively  with 
reference  to  revenue.  The  protectionist  may  logic- 
ally concede  the  fact  and  yet  contend  either  that  the 
hampering  of  the  fiscal  machine  is  of  relatively  little 
moment,  or,  even  if  great  in  itself,  is  more  than 
offset  by  '  the  far  more  exceeding  and  eternal  weight  ' 
of  gain  which  the  policy  of  protection  brings  in  its  wake. 
On  the  other  hand,  it  is  true  that  to  one  who  is  not  con- 
vinced of  the  util/ly  of  the  protective  policy  this  crip- 
pling of  the  arm  of  the  fisc  is  an  additional  grievance 
which  he  lays  up  against  the  protective  system.  But 
that  is  a  matter  which  we  need  not  pursue  here.  What 
IS  much  more  to  our  present  purpose  is  to  point  out 
that,  waiving  the  question  of  protection,  whose  discus- 


THE   TARIFF  POLICY  OF   THE   UNITED  STATES.     155 

sion  here  would  take  us  too  far  afield,  it  will  be  necessary 
to  consider  first  those  jjeneral  aspects  of  customs  duties 
which  are  common  alike  to  protective  and  to  revenue 
tariffs,  and  then  to  give  separate  consideration  to  a  tariff 
system  built  consistently  upon  revenue  principles  only. 
But  before  essaying  this  task  of  establishing  the  princi- 
ples on  which  tariff  duties  ought  to  be  based,  it  will  be 
convenient  to  sketch  in  brief  outline  the  checkered 
course  of  our  national  tariff  policy. 

Tho  Tariff  Policy  of  the  United  States. — It  is  a  matter 
of  some  curious  interest  to  compare  the  antiquity  of 
customs  duties  with  the  modernness  of  excises.  The 
latter  require  naturally  enough  a  developed  system  of 
production  and  exchange,  and  would  obviously  be  im- 
practicable under  a  regime  of  household  industry  or  a 
'  natural  economy.'  Customs  duties,  on  the  other 
hand,  are  almost  as  old  as  the  common  law.  Their 
exact  origin  in  England  is  unknown,  but  "  the  reason 
for  their  existence  is  clear.^  The  merchant  in  those  pred- 
atory times,  when  every  one  was  so  ready  and  eager 
to  fleece  him  that  '  pille  comme  un  marchand  '  became  sub- 
sequently a  proverb,  willingly  paid  on  entering  the  king- 
dom and  on  taking  merchandise  out  of  it  toll  to  the  king 
for  the  necessary  safeguard  for  himself  and  his  merchan- 
dise, ineimdo,  morando,  ct  redcundo,^  in  port,  on  land,  and 
on  the  seas.  The  toll  was,  in  short,  in  the  nature  of  a 
premium  paid  to  the  king  for  insurance.  But  in  what- 
ever manner  these  tolls  may  have  commenced  in  Eng- 
land, they  became  subsequently  definite  in  amount,  ac- 
quired by  continviance  the  validity  allowed  to  that  which 
has  long  existed,  and  so  came  to  be  termed  '  consuetu- 


» S.  Dowell,  A  History  of  Taxation  and  Taxes  in    England, 

Vol.  I.,  p.  75- 

'Quoted  from  paragraph  41  of  Magna  Charta. 


IS6  CUSTOMS  DUTIES. 

dines,'  or  customs."  In  the  cuurse  of  their  development 
the  rates  of  customs  duties  became  flexible,  and  their 
figures  were  fixed  from  time  to  time  by  parhamentary 
statutes.  During  the  period  of  the  settlement  of  the 
English  colonies  in  America  the  customs  machinery  of 
England  was  employed  with  a  protective  purpose  to 
build  up  various  industries  in  England.  Still  this  policy 
of  monopoly  which  was  dictated  by  the  dominant  mer- 
cantile system  did  not  greatly  vex  the  colonists  at  first. 
Cromwell's  Navigation  Act  of  1651  left  them  to  trade 
with  whom  they  would,  but  restricted  such  commerce  to 
the  vessels  of  English  subjects.  Still  this  law  was  hon- 
ored perhaps  as  much  in  the  breach  as  in  the  o]:)ser- 
vance,  inasmuch  as  the  Dutch  continued  thereafter  a 
contraband  trade  with  the  colonies.  Even  when  to  the 
monopoly  of  navigation  there  was  added  later  the  mo- 
nopoly of  trade,  and  when  tranuiiels  were  put  on  inter- 
colonial commerce  and  upon  colonial  manufactures,  the 
yoke  did  not  for  a  long  time  appreciably  gall  the  colo- 
nies. Restrictions  on  foreign  trade  did  not  weigh  heav- 
ily on  the  light-hearted  smuggler ;  restraints  on  inter- 
colonial commerce  were  frequently  practised  by  the 
colonies  against  each  other ;  and  the  strict  prohibi- 
tion against  prosecuting  certain  manufactures  in  the 
colonies  was  not  likely  to  create  much  discontent 
when  their  labor  was  so  much  more  richly  rewarded 
when  applied  to  agriculture  or  commerce,  that  the 
colonies  were  themselves  driven  to  various  expe- 
dients (such  as  bounties  and  in  some  cases  even  to 
protective  duties')  to  promote  the  hoped-for  manufactur- 
ing industries.^  The  war  of  the  Revolution  was  brought 
about  not  so  much  by  the  passage  of  new  acts  as  by  the 
rigid  enforcement  of  existing  statutes.     The  Stamp  Act 

*  Cf.  Rabbeno,  American  Commercial  Pc  licy,  pp.  lOi,  102. 


THE   T/IRIFF  POLICY  OF  THE  UNITED  STATES.     i57 

was,  however,  an  additional  grievance,  and  the  growing 
discontent  of  the  colonists  naturally  centered  around  the 
issue  of  taxation.  During  the  struggle  for  independence 
each  state  practically  adjusted  its  imposts  and  customs 
duties  to  suit  itself.  There  were  certain  shadowy  re- 
strictions in  the  Articles  of  Confederation  upon  the  exer- 
cise of  such  power  by  the  individual  states.  But  here  as 
cisew  ..ere  the  Confederation  proved  but  a  '  rope  of 
?and,'  and  after  the  cessation  of  hostilities  with  the 
mother  country  some  of  the  states  engaged  in  a  mutual 
war  of  retaliatory  tarififs.  Indeed  the  difficulties  attend- 
ant upon  this  tariff  struggle  contributed  effectively  to  the 
calling  of  the  constitutional  convention  and  to  the  fram- 
ing of  the  present  federal  Constitution.  That  document 
lodged  in  the  hands  of  Congress  exclusive  power  i  over 
the  levying  of  import  duties,  and  at  the  same  time  utterly 
forbade  the  imposition  of  duties  on  exports.^  Through- 
out the  Revolution,  Congress  and  its  Financier,  Robert 
Morris,  sought  in  vain  to  obtain  from  the  states  the 
necessary  assent  to  a  modest  federal  impost;  but  the 
plan  failed  both  then  and  afterwards  until  the  necessity 
of  placing  such  power  in  the  hands  of  the  national  gov- 
ernment was  formally  recognized  in  the  new  charter. 

Tariff  legislation  under  the  Constitution  began  with 
the  Act  of  1789,  and  the  first  distinct  era  in  our  tariff 
history  may  be  said  to  extend  from  that  date  to  1808. 
The  character  of  this  patristic  legislation  has  been  por- 
trayed by  contending  disputants  in  very  different  colors. 
Protectionists  cite  the  protective  aim  avowed  by  the  ad- 
vocates of  such  legislation.     They  also  cite  the  distinct 

*  U.  S.  Cons.,  Art.  I,  Sec.  VIII,  i. 

*U.  S.  Cons.,  Art.  I,  Sec.  IX,  5.  The  probable  reason  for 
such  action  was  to  guard  against  possible  injustice  to  any  sec- 
tion. Thus  a  general  tax  on  the  export  of  cotton  would  have 
been  collected  only  in  the  southern  states. 


,58  CUSTOMS  DUTIES. 

statement  of  the  protective  purpose  to  be  found  in  the 
preamble  of  the  first  act.  On  the  other  side  it  is  pointed 
out  that  the  general  level  of  duties  was  but  five  per  cent. 
ad  valorem,  and  that  the  highest  rates  of  duty  on  luxuries 
did  not  rise  above  fifteen  per  cent.  The  truth  seems  to 
be  that  the  willingness  of  Congress  to  accord  a  modest 
degree  of  assistance  to  nascent  American  manufactures 
was  rather  the  outcome  of  the  spirit  of  nationality  intent 
upon  both  political  and  economic  independence  than  any 
very  clearly  reasoned  scheme  of  industrial  development. 
Hamilton,  indeed,  in  his  Report  on  ^lanufactures 
(December,  1791)  put  in  classical  form  the  protective 
creed,  but  it  can  hardly  be  doubted  that  Hamilton  was 
largely  influenced  in  his  advocacy  of  protection  by  po- 
litical considerations,  especially  by  his  desire  to  attach 
to  the  support  of  the  new  federal  government  the  com- 
mercial and  business  classes.  There  was  a  gradual  increase 
of  tariff  duties  until  the  ad  valorem  rates  in  1808  were 
from  15  to  22|  per  cent.  This  increase  has  been  variously 
interpreted.  One  side  alleges  that  it  shows  steady  and 
conscious  growth  of  the  principle  of  protection ;  their 
opponents  maintain  that  almost  every  augmentation  of 
rates  was  due  to  the  growing  needs  of  the  Treasury. 
This  much  seems  to  be  certain,  that  the  amount  of  pro- 
tection afiforded  by  such  moderate  duties  as  were  ac- 
corded up  to  1808  could  not  have  been  very  consider- 
able, and  that  such  duties  did  not  have  the  effect  of 
creating  new  manufacturing  industries  of  any  extent  by 
diverting  labor  and  capital  from  the  fields  of  agricul- 
ture and  commerce,  where  for  the  time  being  the  ex- 
penditure of  industrial  energy  was  most  liberally  repaid. 
The  change  in  our  industrial  conditions  began  about 
1808,  and,  instead  of  being  the  result  of  our  conscious 
choice,  was  forced  upon  us  from  without.     The  struggle 


THE    TARIFF  POLICY  OF  THE  UNITED  STATES.    159 

which  was  pending  between  Napoleon  and  Great  Britain 
involved  us  in  difficulty  on  account  of  the  restrictions 
placed  by  the  contestants  upon  our  commerce.  The  disre- 
gard of  the  rights  of  neutrals  practised  by  France  under 
the  Berlin  and  Milan  decrees,  and  by  Great  Britain  un- 
der warrant  of  Orders  in  Council,  induced  Congress 
in  December,  1807,  to  lay  an  embargo  upon  our  foreign 
commerce.  This  absolute  prohibition  was  mitigated 
later  by  the  substitution  of  the  Non-Intercourse  Act. 
This  milder  act  forbade  foreign  commerce  only  with 
France  and  England,  but  it  did  not  prevent  the  con- 
tinuance of  foreign  complications  which  culminated  in 
1812  in  our  declaration  of  war  against  Great  Britain. 
The  industrial  outcome  of  these  commercial  restrictions 
and  of  the  war  which  followed  was  almost  to  annihilate 
the  importation  of  goods — and  especially  of  manufac- 
tured goods — into  the  United  States.  The  rates  of 
duty  on  imports  were  doubled  during  the  war  in  order 
to  secure  more  revenue.  This  increase  was  of  altogether 
minor  importance,  however,  as  the  volume  of  foreign 
trade  had  dwindled  to  exceedingly  narrow  dimensions. 
This  cessation  of  imports  naturally  gave  an  enormous 
stimulus  to  the  introduction  and  extension  of  domestic 
manufactures.  "  The  interruption  of  trade  was  equiva- 
lent to  a  rude  but  vigorous  application  of  protection."  1 
Our  scanty  supply  of  manufactured  goods,  especially  of 
textiles,  and  the  imperious  necessity  for  the  munitions 
of  war  made  lucrative  these  avenues  of  production,  and 
lured  labor  and  enterprise  from  the  bark  and  the  plow 
to  the  spindle  and  the  forge.  Instead  of  being  a  nation 
almost  exclusively  devoted  to  agriculture  and  commerce, 
we  were  made  perforce  to  introduce  manufactures,  and 

*  Taussig,  Tariff  History  of  the  United  States,  p.  34. 


l6o  CUSTOMS   DUTIES. 

upon  the  simple  structure  of  our  industrial  constitution 
was  superimposed  the  factory  system. 

In  1816  the  high  level  of  duties  which  had  prevailed 
during  the  war  was  replaced  by  a  lower  tariff  averaging 
about  twenty  per  cent.  This  rate  of  duty,  liowever,  was 
the  highest  that  had  ever  prevailed  in  times  of  peace. 
Some  industries,  moreover,  were  avowedly  protected  by 
this  act.  The  textile  industries  were  given  special  as- 
sistance by  the  imposition  of  a  temporary  duty  of  25  per 
cent,  upon  the  importation  of  cotton  or  woolen  goods. 
After  the  return  of  peace  the  accumulated  surplus 
of  English  manufactures  poured  upon  our  mar- 
kets. To  cap  this  came  a  period  of  general  industrial 
depression  in  1819,  when  at  the  same  time  the  foreign 
market  for  our  agricultural  staples  proved  disapj)oint- 
ing.  There  was  much  suffering  both  in  manufacturing 
and  in  agriculture.  A  cure  was  sought  in  legislation, 
and  the  advocates  of  protection  represented  that  policy 
as  the  remedy  for  the  existing  distress.  The  strongest 
support  ^  of  this  policy  was  found  in  the  middle  western 
section,  which  wanted  a  reliable  home  market  for  its 
agricultural  products.  New  England  was  at  first  op- 
posed to  the  protective  movement,  fearing  injury  to  her 
shipping  interests.  But  as  the  factory  system  grew  in 
that  section,  the  opposition  to  protection  became  weaker 
and  the  protective  sentiment  stronger.  The  South  early 
arrayed  itself  against  the  protective  system.  Slavery 
was  incompatible  with  manufactures,  and  thus  very  natu- 
rally the  South  looked  with  little  favor  on  a  system  de- 
signed in  the  first  instance  to  benefit  the  manufacturing 
sections.  In  1820  an  attempt  was  made  to  alvance  du- 
ties, but  the  project  was  foiled,  and  not  until  1824  were 
the  advocates  of  what  Clay  called  the  "American  sys- 

'  Cf.  Taussig,  Tiififf  History   of  \he  TTnited  States,  p.   70  sq. 


THE   TARIFF  POLICY  OF   THE  UNITED  STATES.     i6i 

tem  "  successful  in  raising  the  tariff  rates.  This  move- 
ment reached  its  height  with  tlie  passage  of  the  so-called 
"  tariff  of  abominations  "  in  1828.  From  this  point  the 
tide  began  to  recede.  Duties  were  lowered  in  1832,  and 
in  the  following  year  the  so-called  "  compromise  tariff  " 
was  passed,  which  provided  for  a  gradual  reduction  of 
duties  until  a  uniform  level  at  20  per  cent,  should  be 
reached  in  1842.  The  second  era  in  our  tariff  history 
may  be  said  to  extend  from  1808  to  1832.  This  period 
witnessed  the  inception  of  the  factory  system  springing 
up  under  the  exigencies  of  war,  then  upheld  out  of  mo- 
tives of  national  benevolence,  and  finally  becoming  the 
object  of  conscious  solicitude  and  legislative  favor  until 
in  1832  the  fickle  tide  of  fortune  turned. 

From  1833  to  i860  the  tariff  was,  or  tended  to  be- 
come, a  revenue  tariff.  Exception  must  be  made  only 
of  the  period  1842-46,  when  a  slight  protectionist  re- 
action asserted  itself.  Nor  must  it  be  thought  that  even 
the  Walker  tariff  of  1846  was  in  perfect  consonance  with 
the  postulates  of  an  ideal  revenue  system.  That  meas- 
ure imposed  taxes  on  certain  raw  materials  such  as  wool; 
it  also  exempted  from  duty  such  distinctively  revenue 
articles  as  coffee  and  tea.  Still  if  we  bar  the  early  period 
prior  to  the  second  war  with  England,  this  era  from 
1846  to  i860  marked  our  nearest  approach  to  the  policy 
of  a  tariff  for  revenue  only.  This  ended  the  third  dis- 
tinct phase  of  the  history  of  our  tariff  policy — a  phase 
which  witnessed  the  subsidence  of  the  early  protectionist 
propaganda,  and  an  empirical  approach  to  a  revenue 
system. 

The  customs  policy  of  the  nation  for  the  next  genera- 
tion was  determined  mainly  by  the  civil  war  and  its 
legacies,  political  and  financial.  It  is  true  that  in 
185^-60,  before  war  was  seriously  anticipated,  tentative 


1 62  CUSTOMS  DUTIES. 

efforts  were  making  towards  a  restoration  of  the  protec- 
tive rates  of  1846.  Such  a  measure  passed  the  House 
of  Representatives  in  the  session  of  1859-60,  and  was 
dangled  as  a  bait  ^  before  the  electorate  of  Pennsylvania, 
whose  vote  was  subsequently  cast  in  favor  of  Lincoln, 
the  Republican  candidate  for  President.  This  act  had 
hardly  become  law  by  its  passage  in  the  Senate  when 
the  civil  war  broke  out.  Thereafter  for  a  time  the  urgent 
need  of  revenue  dominated  all  legislation.  The  internal 
revenue  system  2  levied  heavy  taxes  on  the  domestic 
manufacturer.  This  afforded  another  reason  for  ad- 
vancing the  rates  of  customs  duties.  Without  such  an 
advance  the  manufacture  of  certain  articles  in  this  coun- 
try would  be  discriminated  against.  As  Senator  Mor- 
rill said,  "  If  we  bleed  manufacturers  we  must  see  to  it 
that  the  proper  tonic  is  administered  at  the  same  time." 
In  1862  and  again  in  1864  there  were  general  advances 
in  the  rates  of  customs  duties,  partly  to  offset  the  height- 
ened excises,  partly  to  afford  more  revenue,  partly  to 
afford  additional  protection.  Measures  the  most  ex- 
treme and  far-reaching  in  their  effects  were  rushed 
through  Congress  with  inconsiderate  speed  and  after  in- 
considerable debate. 

The  close  of  the  war  found  us  with  a  portentous  tax- 
machine  upon  our  hands.  Those  parts  of  the  machine 
which  were  connected  with  the  internal  revenue  were 
first  overhauled  and  generally  discarded.  Practically 
all  such  excises  as  originally  warranted  the  imposi- 
tion of  higher  additional  rates  of  customs  duties   were 


*  Such  at  least  is  the  testimony  of  Taussig,  Tariff  History  of 
the  United  States,  p.  158;  Sumner,  History  of  Protection,  p.  56. 
I  do  not  know  that  this  position  is  denied  on  the  protectionist 
side. 

"  S?e  p.  135. 


THE   TARIFF  POLICY  OF   THE  UNITED   STATES.      163 

repealed  by  1872.^  The  income  tax  was  lowered  and 
then  swept  away.  The  duties  on  such  typical  revenue 
articles  as  tea  and  cofifee  were  first  reduced  and  then 
abolished.  This  allowed  a  reduction  in  the  govern- 
ment's income,  then  vastly  in  excess  of  its  expenditures, 
and  at  the  same  time  prevented  any  material  change 
in  the  protective  duties.  A  horizontal  ten  per  cent,  re- 
duction in  the  rates  of  duty  was  made  in  1872  as  a  sort 
of  offset  to  the  repeal  of  the  duties  on  tea  and  cofifee. 
In  1873  and  thereafter  the  industrial  depression  checked 
imports  as  well  as  the  revenue  they  yielded;  but  in  1875 
this  ten  per  cent,  reduction  was  repealed  and  the  earlier 
and  higher  protective  duties  were  reinstated.  Thus  "  it 
is  clear  that  the  extreme  protectionist  character  of  our 
tariff  is  an  indirect  and  unexpected  result  of  the  Civil 
War,"  2  no  general  revision,  apart  from  the  temporary 
ten  per  cent,  horizontal  reduction  of  1872,  occurring  un- 
til 1883.  In  this  latter  year  the  various  schedules  were 
overhauled,  and  new  tariff  rates  were  established.  There 
were  some  apparently  considerable  reductions  in  the 
case  of  particular  articles.  But  such  changes  were  fre- 
quently nominal,  and  in  some  instances  really  enhanced 
duties  by  different  systems  of  classifying  imports.  The 
average  ad  valorem  duty  in  1883  was  42.4  per  cent., 
and  in  the  two  subsequent  years  ^  41.6  and  45.8  per  cent., 
respectively.  Hence  the  protective  level  was  not  seri- 
ously depressed  by  the  Act  of  1883. 

In  December,  1887,  President  Cleveland  in  his  Mes- 

'  To  make  plain  the  relation  of  customs  and  an  excise,  let  us 
suppose  a  tax  of  $10  a  ton  is  levied  on  the  home  manufacturer 
of  steel  rails;  in  case  no  customs  duty  is  imposed  on  imported 
rails,  there  would  be  a  clear  discrimination  against  the  domestic 
producer.  Nor  until  the  duty  exceeds  $10  a  ton  is  the  duty 
protective. 

"Taussig,  Tariff  History  of  the  United  States,  p.  193, 
'  Cf.  Statistical  Abstract  of  the  United  States  for  1893. 


"54  CUSTOMS  DUTIES. 

sage  to  Congress  made  an  attack  upon  the  system  of 
protection,  which  he  stigmatized  as  "vicious,  inequitable, 
and  illogical."  In  the  previous  presidential  campaign 
the  tariff  had  played  a  part,  although  the  Democrats  had 
not  accepted  it  as  the  sole  issue  at  stake.  The  Presi- 
dent's Message  in  1887  was  practically  an  acceptance  of 
the  gage  of  battle,  and  determined  the  character  of  the 
presidential  campaign  in  the  following  year.  In  that 
contest  the  Republicans  were  successful,  and  construed 
their  victory  as  a  popular  mandate  to  preserve  the  pro- 
tective system.  The  assault  on  that  system  had  been 
made  partly  from  the  standpoint  of  finance.  The  gov- 
ernment's income  was  in  excess  of  its  expenditure,  and 
it  was  argued  that  a  decrease  in  duties  was  the  proper 
way  to  afford  relief  to  the  taxpayer.  The  solution  of  the 
question  was  attempted  by  the  Republicans  by  generally 
retaining  or  advancing  protective  duties,  by  extending 
such  duties  to  other  industries,  by  abolishing  the  import 
duty  on  raw  sugar,i  and  by  making  more  liberal  expen- 
ditures. The  first  three  projects  were  embodied  in  the 
original  McKinley  bill,  to  which  in  the  Senate  there 
was  tacked  a  Reciprocity  amendment.  This  latter  feat- 
ure empowered  the  President  to  impose  retaliatory  du- 
ties upon  countries  sending  to  the  I'nitcd  States  sugar, 
molasses,  hides,  tea,  or  coffee,  in  case  he  judged  the  du- 
ties imposed  by  these  countries  on  our  products  "  unjust 
or  unreasonable." 

The  significance  of  the  McKinley  bill,  however,  lay 
not  so  much  in  its  heightened  rate  of  duty  on  dutiable 
articles  as  in  its  embodiment  of  tlie  new  attitude  of  the 
adherents  of  protection.     There  had  hitherto  been  a  cer- 

*This  abolition  of  the  sugar  duty  cut  down  the  annual  federal 
income  by  fifty  millions  or  more.  The  sugar  planters  in  this 
country  were  accorded  bounties  by  way  of  compensation. 


THE   TARIFF  DUTIES   OF   THE   UNITED  STATES.     165 

tain  degree  of  relativity  g-enerally  attaching  to  the  doc- 
trine. Hamilton,  the  great  Coryphaeus  of  protection,  in 
his  famous  Report  on  Manufactures  had  said  that  "  the 
continuance  of  bounties  ^  on  manufactures  long  estab- 
lished must  almost  always  be  of  questionable  policy,  be- 
cause a  presumption  would  arise  in  every  such  case  that 
there  were  natural  and  inherent  impediments  to  success. 
But  in  new  undertakings  they  are  as  justifiable  as  they 
are  oftentimes  necessary."  Clay  in  his  speech  of  1824 
had  said:  "  Let  our  arts  breathe  under  the  shade  of  pro- 
tection; let  them  be  perfected  as  they  are  in  England, 
and  we  shall  be  ready,  as  England  now  is  said  to  be,  to 
put  aside  protection  and  to  enter  upon  the  freest  ex- 
changes." Parallel  expressions  might  be  culled  from 
the  speeches  of  Garfield  and  Sherman,  the  successors  of 
Hamilton  and  Clay.  Protection  had  been  regarded  as  a 
schoolmaster  to  bring  us  to  free  trade,  or  as  a  temporary 
concession  to  vested  interests,  or  as  a  momentary  fiscal 
expedient.  But  the  new  school  of  protectionists  appar- 
ently regarded  the  system  as  a  finality  to  be  permanently 
maintained  or  even  extended.  Commercial  isolation, 
rather  than  industrial  maturity,  was  the  essence  of  the 
new  doctrine.  The  political  reverses  of  1890  and  1892 
which  befell  the  Republicans  seemed  to  indicate  that 
pubHc  opinion  had  begun  to  turn  against  extreme  pro- 
tection. In  1894  the  McKinley  bill  was  repealed  and 
the  so-called  Wilson  bill  was  enacted.  The  history  of 
that  measure  is  so  recent  that  it  is  barely  worth  while 
here  to  recount  how  the  original  House  bill,  which 
moved  decidedly  away  from  the  protective  extreme,  was 
amended  in  the  Senate,  and  finally  passed  in  a  shape 

^Hamilton  speaks  here,  it  is  true,  of  bounties;  but  in  a  pre- 
vious passage  in  his  report  when  speaking  of  protective  duties 
he  remarks:  "'  Duties  of  this  nature  evidently  amount  to  a  virtual 
bounty,"  etc. 


1 66  CUSTOMS   DUTIES. 

which,  while  somewhat  abating  the  higher  duties,  was 
essentially  a  protective  measure  except  in  the  case  of 
raw  wool,  which  was  placed  on  the  free  list.  Owing  to 
a  number  of  causes  whose  nature  is  still  a  matter  of  dis- 
pute industrial  depression  began  in  1893.  The  result  of 
the  election  of  1896  was  to  put  the  protectionists  again 
in  power.  The  Dingley  bill  replaced  the  Wilson  tariff 
and  restored  the  high  protective  character  of  our  cus- 
toms duties.^ 

General  Canons  of  Customs  Taxation. — ^The  fore- 
going recital  of  the  alternating  changes  in  our  tariff 
policy  ought  to  convince  us  of  the  whimsicalness  of  our 
electorate  upon  this  subject.  It  must  at  the  same  time 
demonstrate  the  necessity  of  establishing,  so  far  as  pos- 
sible, principles  applicable  to  all  tariffs,  whether  these 
tariffs  be  of  the  protectionist  or  of  the  revenue  variety. 
Agreement  upon  such  very  general  principles  is  of  no 
little  importance.  Very  frequently  the  lack  of  dispas- 
sionate discussion  of  the  question  of  the  tariff  may  be 
traced  to  the  fact  that  instead  of  analyzing  the  operations 
of  the  tariff  in  the  concrete,  from  the  standpoint  of  ad- 
ministration, there  has  been  a  disposition  to  insist  first 
upon  a  confession  of  faith  on  the  main  issue.  Thereafter 
it  is  but  a  short  remove  to  "  the  thunder  of  the  cap- 
tains, and  the  shouting,"  and  that  means  an  end  of 
profitable  discussion.  Nevertheless  there  are  certain 
general  principles  pertinent  alike  to  revenue  and  protec- 
tive measures;  and  in  case  these  were  generally  ac- 
knowledged, the  final  solution  of  the  greater  issues 
might  reasonably  be  anticipated.  These  general  aspects 
of  customs  duties  may  be  treated  under  the  captions  of 
incidence, — or  the  location  of  the  burden  of  such  taxes ; 

'  For   a   brief   summary   of  the   revenue   yielded   by   different 
schedules,  see  page  178. 


GENERAL  CANONS  OE  CUSTOMS   TAXATION.      167 

variation, — their  shrinkage  and  expansion ;  certainty, 
that  is,  their  being-  calculable  or  dependable.  Let  us  con- 
sider these  phases  of  customs  duties,  beginning  first  with 
the  one  last  mentioned.  Whether  we  are  to  have  a  protec- 
tive or  a  revenue  tariff  is  a  matter  of  comparatively  little 
importance  compared  with  the  question  whether  the  tariff 
system  which  we  adopt  is  or  is  not  likely  to  be  subject 
to  speedy  and  extensive  changes.  The  existence  of  well- 
defined  and  stable  law  is  frequently  of  more  importance 
than  the  particular  character  of  the  law  itself.  Absence 
of  law  means  anarchy,  defects  of  law  mean  only  injustice 
at  the  worst.  Mr.  Bryce  in  his  American  Common- 
wealth, in  speaking  of  the  smooth  working  of  our  com- 
plex governmental  system,  says  that  such  men  as  the 
settlers  of  New  England  could  work  any  constitution. 
Something  of  the  same  character  may  be  said  about  our 
business  men.  They  can  thrive — ultimately  at  least — 
under  any  tariff,  and  their  primary  interest  in  the  tariff 
to-day  is  not  that  it  be  high  or  that  it  be  low,  but  that  it 
be  steady  enough  and  dependable  enough  to  remove  the 
unknown  and  unknowable  elements  which  its  present 
instability  creates  in  their  business  calculations.  It  is 
not  possible  even  to  summarize  the  different  ways  in 
which  uncertainty  in  prospective  tariff  rates  disturbs,  de- 
presses, and  complicates  various  industrial  enterprises. 
In  case,  for  example,  the  tax  on  the  manufacturer's  raw 
material  is  likely  to  be  advanced  by  the  tariff,  he  will  be 
strongly  tempted  to  purchase  large  stocks  thereof  in 
order  to  anticipate  the  higher  duty  on  such  material  in 
future.  On  the  other  hand,  the  enhanced  price  of  the 
raw  material  must  ultimately  be  reflected  in  a  higher 
selling  price  of  the  product,  and  ceteris  paribus  in  a  de- 
creased demand  for  the  finished  goods.  So  that  the 
danger  of  accumulating  dead  stock  must  also  be   con- 


1 68  CUSTOMS  DUTIES. 

sidered.  The  case  is  very  similar  to  one  of  those  card- 
board puzzles  where  every  section  dovetails  perfectly 
into  the  others,  and  where  a  change  in  the  size  or  shape 
of  a  single  piece  renders  reconstruction  impossible,  un- 
less every  other  piece  be  reset.  So  a  change  in  one 
item  of  expense  will  very  probably  necessitate  a  com- 
plete readjustment  of  the  other  items  of  merrantil<' 
cost.  This  readjustment  will  probably  involve  a  certain 
amount  of  experimentation  with  its  attendant  risks.  If 
hitherto  there  has  been  an  upward  swing  in  the  trade, 
the  customs  revision  may  blight  with  uncertainty  the 
prospect  of  further  growth.  If  the  trade  has  hitherto 
been  flagging,  a  change  in  customs  duties  will  often 
deaden  the  market  and  postpone  the  normal  recovery. 

The  real  dif^culty  here  lies  in  finding  concrete  means 
to  lessen  the  difficulties  arising  from  tariff  changes. 
Changes  in  tariffs  from  time  to  time  must  be  made, 
Successions  of  surpluses  or  deficits  in  times  of  peace 
make  tariff  alterations  politically  inevitable.  The  ne- 
cessity for  more  revenue  in  times  of  war  often  has  the 
same  effect.  Four  times  in  the  last  fifteen  years  our 
tariff  has  been  overhauled.  So  long  as  the  federal  gov- 
ernment is  debarred  from  the  taxation  of  incomes,  it  is 
hard  to  say  how  there  can  be  introduced  into  federal 
finance  any  elastic  element  which  might  be  used  to  make 
up  a  deficit.^  Still,  the  financier  may  guide  his  feet  in 
part  by  the  lamp  of  experience.  A  moderate  and  tem- 
porary surplus  or  deficit  may  be  less  of  an  evil  than  a 
sweeping  tariff  revision,  just  as  a  stubborn  case  of  in- 
digestion may  be  preferable  to  an  operation  for  appen- 
dicitis. There  is  also  some  considerable  latitude  in  the 
choice  of  the  time  for  tariff  revision.  In  prosperous 
times    changes  may  be  made  with  ease  and  met    with 

'  See  p.  371,  note. 


GENERAL   CANONS  OF  CUSTOMS   TAXATION.       169 

complacency  when  the  same  change  if  made  under  other 
conditions  would  chill  ardor  and  deaden  enterprise. 
Considerable  uncertainty  might  also  be  eliminated  by 
the  general  substitution  of  specific  duties  for  ad  valorem 
duties. 1  It  is  generally  conceded  that  specific  duties  are 
less  likely  to  produce  undervaluation  and  fraud  than  is 
an  ad  valorem  system,  where  a  virtual  premium  is  ofifered 
to  connivance  and  evasion.  The  main  objection  to  spe- 
cific duties  is  that  with  a  fall  in  the  prices  of  the  duti- 
able imports  the  rate  of  taxation  rises.  While  this  must 
be  admitted,  the  shoe  is  on  the  other  foot  when  the 
prices  of  imports  rise ;  and  although  it  is  probable  that 
general  prices  at  present  are  more  likely  to  fall  than  to 
rise,  it  is  undeniable  that  the  greater  certainty  and 
uniformity  ^  of  specific  duties  make  them  on  the  whole 
preferable  to  the  ad  valorem  system.^  Finally  it  may  be 
argued  that  there  may  be  exercised  some  considerable 
choice  in  the  selection  of  articles  upon  which  the  rates  of 
duty  are  to  be  changed.  Something  may  be  said  for  the 
policy  of  confining  the  most  extensive  changes  (whether 
up  or  down)  to  articles  exclusively  of  foreign  production. 
So  long  as  these  articles  are  not  raw  materials,  such 
changes  in  duties  will  throw  the  immediate  problem  of 
recalculating  the  problem  of  cost  upon  the  foreign  pro- 
ducer, and  to  a  certain  extent  upon  the  importer. 
Changes  in  the  prices  of  these  articles  will  of  course 
alter  the  conditions  of  consumption,  and  finally  afTect 
indirectly  the  demand  for  all  products.     But  the  burden 

^  A  specific  duty  is  levied  upon  articles  ordinarily  by  weight 
or  bulk,  e.g.  a  duty  on  coal  of  so  many  cents  per  ton.  Ad 
valorem  duties  are  assessed  upon  the  estimated  price  of  an  arti- 
cle, e.g.  a  duty  on  wool  of  20%  of  its  value. 

^  I  have  heard  importers  claim  that  precisely  the  same  kind 
of  import  was  differently  taxed  at  different  ports  of  entry  under 
the  ad  valorem  system. 

*  Cf.  Hadley,  Economics,  p.  457. 


1 7°  CUSTOMS  DUTIES. 

of  readjustment  is  in  the  first  instance  at  any  rate  im- 
posed upon  other  industries  than  our  own.  We  may 
then  summarize  these  considerations  thus: 

Canon  I.  A  schedule  of  customs  duties  should  be  as 
stable  and  calculable  as  gou^ral  conditions  will  permit;  if 
changes  are  made,  they  should  be  made  at  such  times  and  by 
preference  in  such  schedules  as  will  introduce  the  least  un- 
certainty into  domestic  industry. 

The  second  aspect  of  customs  to  be  here  considered 
is  the  variation  in  their  yield.  The  revenue  netted  by 
any  tarifif  must  depend  on  the  amount  of  dutiable  goods 
entered.  How  greatly  such  imports  will  fall  off  in  bad 
times  depends  largely  on  what  sort  of  goods  a  country 
imports.  If  they  are  food  staples,  the  decrease  will  be 
less  than  if  luxuries  or  conveniences  were  the  chief  im- 
ports. In  the  case  of  the  United  States,  however,  the 
variations  in  customs  revenue  are  likely  to  be  very  great, 
and  such  variations  are  likely  to  create  unusual  difficulty 
in  our  finances.  This  great  variation  is  likely  to  occur  on 
account  of  the  number  and  variety  of  our  dutiable 
imports.  Though  the  demand  for  some  of  them  may  not 
be  very  greatly  curtailed  by  industrial  depression,  there 
are  others  whose  consumption  is  violently  checked,  and 
perhaps  as  speedily  recommenced  when  better  times  set 
in.  The  resultant  of  such  changes  is  reflected  in  the 
astonishing  variations  in  the  yearly  aggregate  of  cus- 
toms duties.  The  following  table  ^  will  illustrate  this 
point: 

'  Taken  from  the  Report  of  the  Secretary  of  the  Treasury 
for  1893,  p.  cxxiv.  It  should  be  said  that  the  only  important 
change  in  this  period  was  a  10%  horizontal  reduction  in  1872. 
The  former  rates  were  restored,  however,  in  1875,  and  then 
remained  substantially  unchanged  until  1883. 


GENERAL  CANONS  OF  CUSTOMS   TAXATION.       171 


RECEIPTS    OF    THE    UNITED    STATES    FROM    CUSTOMS    FOR 
FISCAL    YEARS    ENDING 

June  30,  1872 $216,370,286 

1873 188,089,522 

1874 163,103.833 

1875 "•  157.167,722 

"        1876 148,071,984 

1877 130,956,493 

"        1878 130,170,680 

1879 137,250,047 

"        1880 186,522,064 

"        1881 198,159.676 

"        1882 220,410,730 


It  is  worth  while  to  insist  on  the  fact  that  these  varia- 
tions are  largely  independent  of  the  character  of  the 
tariff,  whether  protective  or  otherwise.  The  period  cov- 
ered by  the  foregoing  table  was  a  protective  period,  but 
incidentally  coincided  with  a  general  ebb  in  business 
operations.  Apart  from  the  diflficulties  entailed  by  such 
a  shrinkage  of  federal  revenue,  the  peculiar  danger  to 
our  federal  finances  comes  from  the  fact  that  we  rely 
to  a  far  greater  extent  than  any  other  nation  of  im- 
portance upon  customs  duties  as  a  source  of  income. 
Whereas  Great  Britain  and  Germany  derive  from  a 
quarter  to  a  third  of  their  imperial  revenues  from  cus- 
toms, we  look  to  customs  for  a  half  or  even  two  thirds 
of  ours.  The  dangers  resulting  from  an  unexpected 
surplus  if  not  so  obvious  as  those  caused  by  a  deficit  are 
perhaps  even  more  insidious.  They  tend  to  produce  ex- 
travagant appropriations  whijh   become  only  too  fre- 


172  CUSTOMS  DUTIES. 

quently  fixed  charges  on  the  annual  budget,  and  thus 
make  a  deficit  when  it  again  occurs  the  more  (Hfficult 
to  get  rid  of.  Many  of  these  prol^lems  must  be  more 
fully  considered  under  the  discussion  upon  Public  Credit 
and  Treasury  Management,  but  enougli  has  been  said  in 
this  place  to  warrant  us  in  framing  provisionall\'  our 
second  rule. 

Canon  II.  A  customs  system  under  which  lars^c  varia- 
tions in  the  annual  revenue  are  certain  shouhi  be  supple- 
mented by  some  provision  for  meeting  deficits  by  borrowing 
or  otherwise.'^ 

Equally  applicable  to  protective  and  revenue  tariffs  is 
a  consideration  of  the  incidence  or  ultimate  burden  of 
customs  duties.  Nor  must  such  an  inquiry  be  con- 
founded with  that  at  issue  between  the  protectionist  and 
the  free-trader.  We  may  resolve  every  point  in  dispute 
in  the  matter  of  incidence  in  favor  of  the  latter,  and  yet 
leave  unresolved  the  question  of  the  ulterior  benefit 
of  a  protective  system.  If  two  boys  between  them 
are  carrying  a  log,  it  is  possible  from  certain  data 
to  judge  whether  the  one  who  is  doing  the  most 
grunting  is  also  carrying  the  greater  weight.  But 
when  this  fact  is  known,  we  may  still  be  in  the 
dark  as  to  whether  such  a  task  is  simply  developing 
his  muscles  or  seriously  overtaxing  his  strength.  It 
is  much  the  same  with  the  question  of  the  incidence 
of  customs  duties.  When  we  have  separated  the  ques- 
tion of  "  who  pays  the  piper  "  from  the  further  question 
whether  after  all  he  was  worth  paying  for,  we  have  fa- 
cilitated the  solution  of  the  first  inquiry  by  eliminating 
or,  at  least,  by  postponing  the  final  conflict.     If  the  gen- 


*  Strictly  speaking  this  is  a  problem  in  Public  Credit.  It  will 
be  seen  by  reference  to  p.  371,  note,  that  this  plan  has  been  partly 
adopted  by  virtue  of  the  Act  of  June  13,  1898. 


GENERAL   C/iNONS  OF  CUSTOMS    TAXATION.       173 

eral  discussion  of  the  problem  of  incidence  ^  has  been 
understood,  it  will  be  readily  perceived  that  the  imposi- 
tion of  duty  upon  an  imported  article  will  normally 
raise  its  price  and  curtail  its  consumption.  In  case  it 
is  produced  abroad  exclusively,  and  under  competitive 
conditions,  this  contemporaneous  rise  in  its  cost  and 
narrowing  of  its  market  must  force  certain  producers 
ultimately  to  discontinue  or  decrease  their  former  out- 
put. The  new  marginal  producer  will  thereafter  recover 
his  expenses  of  production  out  of  the  price  he  receives, 
and  this  increased  price  must  be  borne  by  the  consumer. 
Others  will  feel  the  eflect  of  the  tax  in  being  forced  to 
lessen  or  stop  their  consumption  of  the  article.  If  the 
foreign  producer  had  a  monopoly  ^  of  an  article,  such 
as  tea,  it  is  possible  that  the  duty  imposed  would  first 
come  out  of  his  profits,  and  that  the  selling  price  in  the 
importing  country  would  remain  unchanged,  especially 
if  an  advance  in  the  price  of  the  tea  seriously  lessened  its 
use.  When  the  duty  reached  such  a  point  that  the  profit 
realized  by  the  foreign  growers  was  no  longer  above  the 
ordinary  profits  in  the  East,  the  first  rule  would  come 
into  operation,  and  the  increments  in  the  duty  there- 
after would  ultimately  fall  on  the  consumer.  Finally 
comes  the  case  where  part  of  the  supply  of  an  article 
is  produced  abroad  and  where  another  part  is  produced 
at  home.  It  is  obvious  that  on  such  articles  as  are  im- 
ported the  duty  paid  will  be  borne  by  the  producer  or 
consumer  in  accordance  with  the  two  rules  just  enun- 
ciated. The  duty  serves,  in  case  the  domestic  expenses 
of  production  are  greater  than  the  foreign  expenses  of 

'Cf.  Chapter  II   (Part  II). 

^  It  must  be  remembered  that  it  by  no  means  follows  that 
because  an  article  is  exclusively  produced  in  one  country  its 
sale  will  be  monopolized.  It  is  more  usual  to  find  competition 
between  the  various  foreign  producers  or  exporters. 


174  CUSTOMS  DUTIES. 

production,  to  offset  the  greater  cost  of  the  domestic 
product,  and  thus  to  render  the  home  production  of  the 
article  possible.  Hence  it  is  evident  that  the  price  paid 
per  unit  for  the  domestic  product  is  greater  than  if  the 
whole  supply  were  imported.  This  greater  price  paid 
for  the  domestic  product  is  virtually  a  tax  upon  the  con- 
sumer, though  it  yields  no  money  to  the  fisc,  and  no 
subsidy  necessarily  to  the  home  producer.  The  prin- 
ciple is  illustrated  by  the  cases  of  sugar  and  whiskey 
cited  by  Mr.  Thomas  G.  Shearman  in  his  work  on 
Natural  Taxation  ^  (p.  ii).  He  says:  "The  tax  upon 
foreign  sugar  is  admittedly  paid  by  our  own  people.  For 
many  years  it  amounted  to  70  per  cent,  of  the  cost,  and 
amounted  to  nearly  $60,000,000  per  annum.  In  addi- 
tion to  this,  about  180,000  tons  were  annually  produced 
at  home,  the  price  of  which  to  the  consumer  was  in- 
creased by  at  least  two  cents  a  pound  by  the  tariff,  or 
about  $8,000,000  in  all.  Either  the  whole  of  this 
$8,000,000  went  into  the  pockets  of  a  few  sugar-planters, 
or,  which  is  more  probable,  they  only  gained  half  of  it, 
while  the  other  half  was  wasted  in  misapplied  human 
effort."  Whether  this  sum  was  "  misapplied  "  depends, 
of  course,  upon  the  view  one  takes  of  diversifying  do- 
mestic industry  and  similar  arguments  urged  in  support 
of  the  protective  system.  Into  that  wider  question  we 
do  not  here  enter,  but  shall  content  ourselves  with  sum- 
marizing our  conclusions  in  the  third  rule. 

Canon  III.  The  levying  of  c\tstom>s  duties  should  proceed 
upon  the  assumption  that  the  incidence  of  such  taxes  will 
be  normally  upon  the  consumer  unless  the  taxed  import 
be  produced  exclusively  abroad  under  monopoly  condi- 
tions. 

^  I  will  not  vouch  for  the  accuracy  of  Mr.  Shearman's  esti- 
mate. 


THE  REVENUE   TARIFF  SYSTEM.  175 

The  Revenue  Tariflf  System. — It  has  already  been 
pointed  out  that  the  two  distinct  objects — protection 
and  revenue — which  most  tariffs  are  designed  to  pro- 
mote are  largely  incompatible.  Such  measures  aim, 
therefore,  not  only  to  realize  a  double  purpose,  which  is 
difficult,  but  to  reconcile  cross-purposes,  which  is  im- 
possible. They  must  in  consequence  become  mere  me- 
chanical compromises  on  the  one  hand,  or  concealed 
surrenders  on  the  other.  It  is  therefore  with  a  sense 
of  relief  due  to  the  simplification  of  the  problem  that  the 
student  of  finance  turns  to  the  discussion  of  a  tariff  sys- 
tem founded  exclusively  on  financial  considerations.  Such 
a  tariff  we  call  a  revenue  tariff.  By  this  we  mean  a  tariff 
system  wliich  makes  revenue  the  one  paramount  con- 
sideration, and  which  is  not  designed  to  afford  to  do- 
mestic industry  any  shelter  from  outside  competition. 
Such  a  system  does  not  imply  that  the  revenue  raised  in 
virtue  thereof  is  the  greatest  that  could  possibly  be  ex- 
torted without  contravening  the  general  principles  of  a 
revenue  system ;  but  simply  that  the  sole  aim  in  levying 
duties  is  to  raise  revenue.  Whether  the  aggregate  of 
such  revenue  be  great  or  small  ought  to  depend  on  the 
current  expenses  of  the  government. 

Viewing  the  matter  from  a  financial  standpoint  exclu- 
sively we  may  pronounce  a  revenue  system  definitely 
superior  to  a  protective  system,  first,  because  it  will  nor- 
mally produce  more  revenue  in  the  aggregate  from  each 
particular  import  taxed ;  secondly,  because  it  simplifies 
the  whole  problem  of  the  construction  of  a  tariff  by 
eliminating  the  disturbing  factor  of  protection  1  ;    third, 

*  It  is  of  course  open  to  the  protectionist  to  argue  that  the 
financial  disadvantages  of  a  protective  tariff  are  more  than  offset 
by  the  ulterior  effects  of  protection  in  diversifying  industry,  in 
effecting  a  more  advantageous  distribution  of  the  national  in- 
come, and  in  thus  rendering  the  ultimate  sources  of  private 
income,  and  therefore  of  public  incgme,  more  copious  than  they 
could  otherwise  be, 


176  CUSTOMS  DUTIES. 

because  a  revenue  tariff  does  not  take  more  from  the 
pocket  of  the  taxpayer  than  it  turns  into  the  Treasury.^ 
"  Whatever  be  the  details  of  the  working  of  a  protective 
duty,"  says  Professor  Taussig,-  "  it  is  prima  facie  less 
desirable  than  a  revenue  duty,  on  the  simple  ground  that 
the  tax  serves  not  to  yield  revenue,  but  to  offset  the 
greater  cost  of  making  the  commodity  at  home."  Even 
though  importations  because  of  the  high  duty  cease  al- 
together, and  though  the  domestic  price  may  be  less  than 
the  price  of  the  duty-paid  import,  there  is  levied  upon 
the  purchaser  a  concealed  tax  in  the  higher  price,  for  it 
could  not  be  exacted  did  a  lower  duty  allow  the  article  to 
be  brought  in  from  abroad.  In  the  case  above  cited 
the  tax  ordinarily  serves  to  cover  the  greater  cost  of 
producing  the  article  at  home,  and  no  part  of  the  tax 
thus  surreptitiously  levied  finds  its  way  into  the  Treasury 
vaults. 

The  framing  of  a  revenue  tariff  involves,  first,  the 
choice  of  articles  on  which  to  levy  import  duties,  and, 
secondly,  the  ascertaining  of  those  rates  which  will  afford 
the  revenue  sought.  To  secure  adequate  revenue  such 
articles  must  be  chosen  as  are  imported  in  great 
quantity  and  for  which  the  demand  is  relatively  stable. 
It  is  also  highly  desirable  that  these  articles  should  be 
mainly  of  foreign  production  and,  where  possible,  fin- 
ished products  rather  than  raw  materials.  The  reasons 
for  the  last  two  qualifications  are  plain.  Goods  pro- 
duced exclusively  abroad  will  not,  when  taxed,  raise  the 

'  .^.t  least  it  does  not  have  this  effect  if  supplemented  by 
corresponding  excises  on  such  domestic  products  as  might 
otherwise  be  protected  by  a  purely  revenue  duty.  Whether 
such  a  corresponding  excise  be  imposed  or  not,  the  indirect 
cost  of  a  revenue  tariff  is  considerably  less  than  that  of  a  pro- 
tective tariff,  because  a  revenue  tariff  by  preference  selects  foi 
taxation  articles  exclusively  of  foreign  production. 

'Tariflf  History  of  the  United  States,  p.  187. 


THE  REl^ENUE   TARIFF  SYSTEM.  177 

prices  of  domestic  products.  Thus  they  will  not  levy 
what  is  substantially  a  tax  (never  received  by  the  gov- 
ernment) in  the  guise  of  higher  prices  paid  for  the  do- 
mestic product.  In  case,  however,  considerations  of 
revenue  require  us  to  levy  duties  on  imports  which  com- 
pete with  domestic  products,  the  protection  thus  inci- 
dentally afiforded  the  home  producer  may  be  ofifset  by 
levying  on  every  unit  of  the  domestic  product  an  excise 
exactly  equivalent  to  the  import  duty.^ 

The  considerations  which  dictate  the  exemption  of 
raw  material  are  that  its  taxation  hampers  at  the  outset 
all  industries  which  depend  on  the  supply  of  the  raw 
material.2  Where  industrial  development,  however,  has 
concentrated  the  elaboration  of  the  raw  material  in  a 
very  few  plants,  such  a  tax  on  the  raw  material  may 
impose  but  little  burden  on  the  manufacturers,  and  but 
little  difficulty  on  the  tariff  administration.  Sugar  re- 
fining in  the  United  States  would  perhaps  be  an  instance 
of  this  rather  exceptional  state  of  affairs. 

From  this  standpoint  such  articles  as  tea  ^  and  coffee 
would  be  ideal  objects  for  subjecting  to  customs  duties 
upon  their  importation  into  the  United  States.  Raw 
sugar  (from  which  at  present  millions  of  revenue  are 


'  This  is  the  English  system.  Corresponding  to  such  excises 
most  governments  allow  the  home  producer  a  drawback  on  the 
exportation  of  materials  which  when  imported  were  subjected 
to  a  duty.  Unless  this  were  done,  the  home  producer  would 
be  handicapped  in  foreign  markets. 

'  The  contention  that  the  enhanced  price  of  the  raw  material 
is  reflected  in  a  higher  price  of  the  finished  product  because 
interest  or  profits  are  computed  on  a  higher  expense  art  the 
start  and  increase  in  a  geometrical  ratio  on  every  turn-over 
thereafter,  is  offset  largly  by  the  earlier  date  at  which  the 
Treasury  derives  its  revenue.  The  real  reason  for  objecting 
to  the  tax  on  raw  material  must  be  based  rather  on  the  hamper- 
ing of  industries  using  the  raw  material. 

^  Since  this  was  written  the  Act  of  June  13,  1898,  subjected 
tea  to  a  duty  of  ten  cents  per  pound. 


178  CUSTOMS  DUTIES. 

derived)  approximately  meets  the  tests  above  mentioned. 
Tropical  fruits  of  various  kinds  are  very  properly  re- 
quired to  contribute  to  our  customs  revenue.  On  the 
other  hand,  it  will  readily  appear  that  such  articles  as 
the  manufactures  of  wool  and  cotton  are  not  lit  subjects 
for  customs  duties,  although  the  large  investments  in 
these  manufactures  may  dictate  moderation  in  any  pro- 
posed reduction  or  abolition  of  existing  duties. 

In  general,  it  may  be  said  that  a  revenue  tariff  will 
embrace  relatively  few  articles  in  its  list  of  taxables. 
When,  on  the  contrary,  protection  is  designedly  afforded 
to  domestic  industries,  the  tariff  list  must  embrace  hun- 
dreds and  even  thousands  of  commodities.^  Even  in 
this  latter  case  it  is  generally  found  that  the  bulk  of  the 
revenue  comes  from  relatively  few  articles.  In  the 
United  States,  for  example,  in  1895  four  articles — sugar 
and  the  manufactures  of  wool,  cotton,  and  silk — consti- 
tuted a  third  of  the  total  value  of  the  dutiable  imports 
brought  to  our  shores.  Six  other  articles — the  manu- 
factures of  textile  grasses,  tobacco,  chemicals,  tin  plates, 
fruits,  and  liquors — made  another  third.  Obviously  the 
fewer  the  articles  taxed,  the  less  will  be  the  cost  of  col- 
lecting customs  duties. 

Assuming  then  that  choice  has  been  made  of  such 
articles  as  ought  on  the  principles  of  a  revenue  tariff  to 
be  taxed,  what  rates  of  duty  ought  to  be  imposed  ?  This 
inquiry  is  entirely  independent  of  the  question  whether 
duties  should  be  imposed  on  a  specific  or  an  ad  valorem 
basis.  The  tendency  of  specific  duties  to  operate  so  as 
to  automatically  increase  the  degree  of  protection  when 
the  price  of  the  taxed  article  falls  has  created  a  liking  for 

'Such  is  the  case  at  present  in  the  United  States;  in  Great 
Britain,  on  the  contrary,  there  are  not  more  than  half  a  hundred 
articles  liable  to  import  duty,  and  but  a  dozen  of  these  are 
important  as  sources  of  revenue. 


THE  RHyENUE   TARIFF  SYSTEM.  1 79 

ad  valorem  duties  on  the  part  of  the  opponents  or  protec- 
tion. This  question,  however,  of  the  basis  on  which  duties 
should  be  imposed  is  essentially  a  question  of  administra- 
tion, and  has  no  bearing  on  the  proper  issue  here  under 
discussion.^  On  the  supposition,  therefore,  that  the  arti- 
cles chosen  for  tariff  duties  are  to  afiford  the  maximum  of 
revenue,  the  rates  of  duty  must  be  so  set  that  the  total 
imports  at  those  rates  of  duty  must  when  multiplied  into 
the  respective  rates  yield  the  maximum  sum.  Here  a 
certain  amount  of  experimentation  is  necessary.  But 
theory  as  well  as  experiment  goes  to  prove  that  such 
rates  of  duty  must  be  under  the  rates  ordinarily  imposed 
by  a  protective  system.  This  was  clearly  pointed  out 
by  Adam  Smith  in  the  Wealth  of  Nations  ^  where  he 
says :  "  High  taxes,  sometimes  by  diminishing  the  con- 
sumption of  the  taxed  commodities,  and  sometimes  by 
encouraging  smuggling,  frequently  afiford  a  smaller 
revenue  to  the  government  than  what  might  be  drawn 
from  more  moderate  taxes.  When  the  diminution  of 
the  revenue  is  the  effect  of  the  diminution  of  consump- 
tion there  can  be  but  one  remedy,  and  that  is  the  lower- 
ing of  the  tax."  This  can  be  readily  seen  in  the  limiting 
case.  A  tariff  so  highly  protective  as  to  exclude  im- 
ports altogether  would  produce  as  little  revenue  as  abso- 
lute free  trade.  To  afford  any  protection,  duties  must 
be  so  high  that  importation  will  be  curtailed,  and  thus 
one  of  the  factors  whose  product  determines  the  customs 

'  Under  a  revenue  tariff  there  would  of  course  be  no  neces- 
ity  for  "  mixed  "  or  compensatory  duties.  An  example  of  such 
"  mixed "  duties  was  afforded  by  the  tariff  on  woolen  goods 
under  the  Act  of  i88.^.  Raw  wool  was  taxed  to  protect  the 
native  wool  grower.  Then  to  protect  the  domestic  wool  manu- 
facturer woolen  goods  were  doubly  taxed.  First  a  tax  was  laid 
on  the  estimated  amount  of  raw.  wool  required  to  make  the 
goods,  and  then  a  second  tax  was  levied  upon  the  goods  in 
order  to  protect  the  domestic  manufacturer. 

"  Book  v.,  Chap.  II.,  p.  481  in  Vol.  II.  of  Rogers'  edition. 


l8o  CUSTOMS  DUTIES. 

revenue  is  lessened.     Hence  revenue  rates  will  normally 
be  below  protective  rates  of  duty.i 

To  foretell  the  future  of  our  tariff  policy  in  the  United 
States  is,  of  course,  impossible.  Our  past  history  ought 
to  warn  us  from  even  attempting  to  prophesy.  But, 
barring  the  case  of  war,  there  are  what  appear  to 
be  at  least  significant  indications  of  the  course  which 
tarifif  legislation  is  likely  to  take.  First  of  all,  it  will  not 
be  likely  to  take  very  radical  steps  in  any  direction.  The 
power  of  vested  interests  alone  will  probably  prevent 
any  rapid  transition  to  a  revenue  system.  On  the  other 
hand  it  seems  not  improbable  that  the  halcyon  days  of 
ultra-protectionism  are  numbered.  The  woolen  manu- 
facturers have  had  a  taste  of  free  wool,  and  some  of  them 
at  least  were  not  over-anxious  to  return  to  the  old  system. 
Our  manufacturers  in  many  other  quarters  are  begin- 
ning to  realize  that  there  is  a  foreign  market,  and  their 
dreams  of  conquest  include  the  markets  of  the  world. 
The  farmer  has  recognized  that,  wool  apart,  his  benefit 
from  protection  is  purely  nominal.  The  transportation 
companies  also  are  realizing  that  their  greater  interests 
are  wrapped  up  in  expanding  commerce.  So  that  it 
seems  not  impossible  that  another  generation  may  see 
the  proximate  realization  of  a  revenue  system  in  the 
United  States. 

*  It  is  conceivable  that  a  number  of  different  rates  of  duty 
will  net  the  same  revenue.  Thus  if  under  a  rate  of  50  cts.  a  ton 
100,000  tons  were  imported,  the  revenue  would  be  $50,000;  if  at 
a  rate  of  $1  a  ton  50,000  tons  were  imported,  the  revenue 
would  also  be  $50,000.  Indeed  it  is  possible  that  at  the  higher  rate 
the  imports  might  be  60,000  tons,  in  which  case  the  revenue 
would  be  $60,000.  Here  the  higher  rate  both  affords 
more  protection  and  more  revenue.  Experience  shows 
that  this  is,  however,  an  exceptional  case.  Moreover,  the 
higher  price  (resulting  from  the  higher  duty)  charged  to  con- 
sumers of  the  domestic  product  is  an  unseen  extra  tax  which  is 
levied  by  virtue  of  the  higher  rate.  It  is  an  instance  of  the 
curtailment  of  "  consumers'  rent." 


CHAPTER   VIIL 

THE    INCOME   TAX. 

Nature  of  Income  Taxes. — The  preceding  chapters 
have  described  the  system  of  taxation  as  it  exists  to-day 
in  the  United  States.  The  present  chapter  will  treat  of 
the  income  tax, — a  fiscal  resource  which  most  theoretical 
financiers  incline  to  think  we  cannot  do  long  without, 
but  which  has  not  as  yet  won  for  itself  a  lasting  place  in 
our  system.  Besides  the  theoretical  interest  attaching  to 
the  subject  much  that  is  valuable  historically  is  found  in 
the  history  of  such  taxes  in  the  United  States,  for  we 
have  had  two  federal  income  tax  laws, — 

"...  one  dead, 
The  other  powerless  to  be  born." 

and  the  untimely  fate  of  either  is  big  with  significance. 
But,  first  of  all,  what  is  meant  by  income f  We  may 
be  tempted  at  the  outset  to  say  of  income,  as  Mill  un- 
fortunately said  about  wealth,  that  every  one  has  a  sufili- 
ciently  correct  notion  for  general  purposes  of  what  in- 
come is.  Most  people  have,  or  think  they  have,  a  pretty 
sharply  defined  idea  of  the  size  of  their  income, — at  least 
of  last  year's  income, — which  they  commonly  express  in 
terms  of  dollars  and  cents ;  and  this  mercantile  approxi- 
mation is  certainly  indispensable  in  every-day  life.  But, 
like  many  another  idol  of  the  market-place,  the  com- 
mercial   conception    necessitates    a    somewhat    sharper 

i8i 


l82  THE  INCOME    T/1X. 

complementary  scrutiny  tlian  might  be  suspected.^  If 
we  confine  ourselves  to  sucli  kinds  of  wealth  as  be- 
long to  individuals  in  their  private  capacity,  that 
is  to  say,  if  we  exclude  goods  like  air  and  sunlight  that 
are  free  to  all,  and  if  we  also  exclude  public  property, 
such  as  government  buildings,  which  belong  to  us  all 
alike,  we  have  a  vast  mass  of  property  the  use  of  which 
affords  the  property  owners  a  calculable  amount  of  ad- 
vantage. These  advantages  constitute  the  income,  or  a 
part  of  the  income,  of  society.  It  is  not  at  all  necessary 
that  property  in  order  to  afford  an  income  should  first 
pay  a  certain  amount  of  money  into  its  owner's  pocket. 
One's  stable  affords  as  true  an  income  as  one's  stocks ; 
one's  bicycle  as  true  an  economic  advantage  as  one's 
bonds ;  the  dwelling-house  which  one  occupies,  as  indis- 
putable an  income  as  the  tenement  one  lets  to  another 
for  a  money  rent.  The  commercial  view  is  liable  to  err 
just  here,  and  to  count  as  income  those  receipts  only 
which  accrue  in  current  coin.  In  addition  to  income 
received  from  property,  much  income — 'perhaps  the 
greater  part  in  the  aggregate — comes  from  service 
or  labor  ^  performed  either  directly  for  one's  self  or 
for  another,  who  makes  a  return,  often  in  money. 
Strictly  speaking,  therefore,  one's  income,  from  an  eco- 
nomic standpoint,  consists  for  any  given  period  in  the 
sum  total  of  advantages  he  derives  from  his  property 
(directly  or  indirectly,  by  immediate  use  or  through 
handing  it  over  to  others  for  a  consideration)  plus  the 
advantages  derived  immediately  or  mediately  from  his 
own  labor  or  exertions.     Or,  briefly  put,  income  is  the 


^Vide  Hadley,  Economics,  p.  5  sq.;  Cannan,  Elementary 
Political  Economy,  p.  39  sq. 

"  Vide  Nicholson,  Money  and  Monetary  Problems,  2d  edition, 
Part  II.,  Ch,  XII.,  The  Living  Capital  of  the  United  Kingdom. 


HISTORY   OF  INCOME    TAXES  IN  ENGLAND.         183 

sum  of  economic  benefits  received  in  a  unit  of  time,  or- 
dinarily a  year.  When  this  flozv  of  advantages,  measured 
in  money  terms,  is  taken  as  the  basis  for  imposing  taxes, 
we  are  in  the  domain  of  income  taxation.^  Paradoxical 
as  it  may  seem,  the  economic  conception  of  income  is 
clear  just  because  the  conception  is  abstract.  When 
the  legislator  is  compelled  to  frame  an  income  tax  law 
he  frames  a  ponderous  inventory  of  concrete  income 
sources ;  and  fine  as  the  tax  net  may  be  woven,  much 
that,  in  the  economic  sense,  is  real  income  slips  through 
its  meshes. 

History  of  Income  Taxes  in  England. — The  income 
tax  is  not  yet  a  century  old,  and  is  the  most  salient  illus- 
tration of  the  general  tendency  in  modern  finance  to  in- 
crease the  proportion  of  the  national  revenues  derived 
from  direct  taxation.^  Like  so  many  other  war  expedi- 
ents, the  English  income  tax  belongs  to  the  numerous 
progeny  of  Necessity,  having  been  instituted  by  Pitt  in 
1799  as  a  war  tax.  It  w-as  temporarily  repealed  in  1802 
on  the  prospect  of  peace,  but  the  resumption  of  hostili- 
ties the  next  year  saw  the  tax  reimposed,  and  that,  too, 
in  the  scheduled  form  which  it  still  bears.  The  clamant 
exigencies  of  the  struggle  with  Napoleon  induced  the 
British  taxpayers  in  1806  to  submit  to  a  ten  per  cent, 
tax  on  incomes,  and  it  is  not  surprising  that,  after  stag- 
gering under  an  incredible  tax  burden  for  years,  England 
rose  in  stubborn  revolt  in  181 6,  after  the  final  defeat  of 
her  antagonist,  and  for  a  time  shook  ofif  the  income  tax 


*  If  the  property  which  yields  the  income  is  taken  as  the  basis, 
the  tax  is  the  general  property  tax.     J'idc  Ch.  V. 

'  "  The  modern  tendency  in  England  has  shown  a  remarkable 
movement  in  this  direction,  over  40  per  cent,  of  the  national 
income  now  coming  from  direct  taxation,  as  compared  with  25 
per  cent,  a  quarter  of  a  century  ago."  H.  Higgs,  The  Physio- 
crats, p.  144. 


1 84  THE  INCOME   TAX. 

altogether.  Such  radical  action  was  very  natural,  very 
excusable  one  might  almost  say,  except  that  it  led  to  a 
long  series  of  deficits  and  presented  more  than  once  the 
lamentable  picture  of  a  "  chancellor  of  the  exchequer 
seated  on  an  empty  chest,  by  the  pool  of  a  bottomless 
deficiency,  fishing  for  a  budget."  ^  Not  until  1842  was 
the  unpopular  tax  reimposed,  and  then  only  with  the 
understanding  that  it  was  to  be  but  a  stop-gap.  Mr. 
Buxton  has  concisely  outlined  its  history.-  "  Revived 
as  a  temporary  tax,"  says  he,  "  for  a  specific  purpose, 
it  still  remains — il  n'y  a  que  Ic  provisoirc  qui  dure — and  is 
on  a  more  permanent  footing  than  ever.  Originally  im- 
posed by  Pitt  as  a  war  tax ;  revived  by  Peel  for  three 
years  for  the  purpose  of  placing  the  finances  of  the  coun- 
try on  a  sounder  basis  and  to  promote  fiscal  and  commer- 
cial reform,  it  was  renewed  another  three  years  for  the 
same  purpose.  Again  renewed  for  a  like  period  in  order 
to  fill  a  void,  annually  renewed  for  a  couple  of  years,  it 
was  then  in  1853  voted  for  a  provisional  period  of  seven 
years,  and  was  again  combined  with  fiscal  reforms  and 
remission  of  other  taxation.  But  war  ^  broke  out  almost 
at  once,  and  the  tax  was  again  utilized  for  its  original 
purpose.  Subsequently  reduced  to  the  old  sevenpence 
(i.e.  seven  pence  per  pound,  or  about  3  per  cent.),  from 
that  time  onward  it  has  been  a  yearly  tax,  and  has  varied 
in  amount  between  the  lod.  of  i860  and  the  2d.  of  1874 
and  1875."  4 

It  is  not  uncommon  in  works  on  finance  to  hear  of 
the  advantages  and  defects  of  income  taxation, — ^by 
which    is    ordinarily    meant    income    taxation    in    Great 

*  Dowell,  History  of  Taxation  and  Taxes  in  England,  Vol. 

II.,  p.  315- 

*  Buxton,  Finance  and  Politics,  Vol.  II.,  pp.  169,  170. 
•The  Crimean  War,  1854. 

*Thc  rate  at  present  is  8d.  per  pound. 


HISTORY  OF  INCOME    T/iXES  IN  ENGLAND.        185 

Britain,  so  that  it  will  be  worth  while  to  describe  the 
present  English  tax  somewhat  in  detail.  The  official 
name  of  the  tax,  to  wit,  the  "  property  and  income  tax," 
serves  as  a  sort  of  blanket  title  for  five  kinds  of  taxes 
imposed  on  five  separate  sources  of  income.  Generally 
speaking-,  no  attention  is  paid  to  the  aggregate  income 
of  any  taxpayer,  but  each  of  his  sources  of  income  is 
levied  upon.  Under  Schedule  A  incomes  derived  frotp 
lands  or  houses  owned  are  taxed.  In  case  the  property 
is  mortgaged  the  tax  paid  by  the  mortgagor  may  be  de- 
ducted from  the  interest  he  owes  the  mortgagee.  In  es- 
timating incomes  under  Schedule  A  an  abatement  of 
one  eighth  in  farm  rentals  and  of  one  sixth  in  building 
rentals  is  conceded  as  a  sort  of  compensation  for  the 
estimated  cost  of  repairs  and  insurance  required.  Sched- 
ule A  comprises,  therefore,  the  incomes  of  the  owners 
of  real  estate.  It  is,  however,  the  occupier  of  the  property 
who  in  most  cases  advances  this  tax,  subsequently 
deducting  the  amount  thereof  when  next  he  pays  his 
rent.  Schedule  B  includes  the  income  of  the  occupiers  of 
land,  especially  tenant  farmers,  and  also  such  owners  as 
are  in  actual  occupation,^  the  amount  of  such  income  being 
based  on  a  certain  proportion  of  the  annual  rent. 
Bondholders  are  taxed  under  Schedule  C,  and  have 
their  taxes  deducted  by  the  Bank  of  England  out  of  the 
interest  on  the  public  securities  they  own  or  the  annui- 
ties they  enjoy.  Similarly,  Schedule  E  comprises  in- 
comes derived  from  government  salaries  and  pensions, 
and  from  public  corporation  salaries,  out  of  which  the 

^ "  Originally  the  occupier  pays  both  taxes  (A  and  B)  where 
they  are  chargeable,  and  subsequently,  if  a  tenant,  deducts  the 
tax  under  Schedule  A  from  the  next  payment  of  rent  to  his 
landlord."     Dowell,  op.  cit.,  Vol.  III.,  p.  114. 


«86  THE  INCOME  TAX. 

tax  is  deducted  before  the  residue  reaches  its  final  desti- 
nation. In  these  four  schedules  the  method  of  stoppage 
at  the  source  is  applied  with  a  fair  degree  of  success,  but 
Schedule  D,  the  drag-net  tax,  professedly  covering  all 
other  incomes,  such  as  those  derived  from  trade,  profes- 
sional service,  and  wages,  is  assessed  upon  returns  made 
by  the  taxpayer.  This  schedule  yields  nearly  one  half 
cf  the  aggregate  revenue  derived  from  the  income  tax, 
and  allows,  of  course,  the  usual  amount  of  evasion  which 
self-assessment  always  produces.  Incomes  under  £700 
are  assessed  not  on  their  full  value,  but  are  allowed  abate- 
ments, and  all  incomes  under  £160  are  exempted  alto- 
gether under  Schedule  D.  The  incomes  of  charitable  insti- 
tutions, schools,  and  provident  societies  are  exempt  from 
the  income  tax,  and  life-insurance  premiums  are  de- 
ducted in  computing  income. 

General  CharacterigticB  of  Income  Taxes.  — Whether 
a  colorless,  theoretical  discussion  of  the  general  princi- 
ples of  income  taxation  is  likely  to  prove  very  fruitful 
may  well  be  doubted.  For  income  taxes,  as  we  find 
them  in  operation,  are  not  a  mere  '  bloodless  ballet  of 
categories  '  financial,  but  generally  a  set  of  fiscal  expe- 
dients diflfering  from  country  to  country,  originally  im- 
posed by  necessity  and  retained  through  despair  of 
finding  a  less  obnoxious  substitute.  Prussia,  to  be  sure, 
has  a  model  income  tax,  "  not  ideally  perfect,"  it  is  con- 
ceded, "  but  laid  down  in  accordance  with  the  general 
principles  enunciated  "  ^  by  sound  finance,  one  of  whose 
dicta,  it  is  rather  curious  to  observe,  is  the  declaration 
of  income  by  the  taxpayer, — a  device  which,  experience 
has  taught,  leads  always  to  fraud.  Italy,  too,  has  an 
income  tax  which,  like  "  the  property  tax  in  the  United 

*  Plehn,  Introduction  to  Public  Finance,  p.  236. 


GENERAL   CHARACTERISTICS  OF  INCOME   TAXES.    187 

States,  is  ineffective  through  evasion."  ^  But  after  mak- 
ing all  allowances  for  innumerable  differences  in  detail, 
there  are  certain  considerations,  somewhat  attenuated  to 
be  sure,  which  apply  to  income  taxes  generally. 

Historically  considered,  income  taxes  have  been  more 
or  less  successful  efforts  to  throw  an  increased  share  of 
public  expenses  upon  the  wealthy.  Put  into  the  techni- 
cal language  of  finance,  this  phase  of  income  taxation  is 
generally  summed  up  in  the  phrase — Equalization  of 
Taxation.  Evidently,  where  taxes  are  imposed  upon  the 
great  staples  of  consumption,  whether  manufactured  at 
home  or  imported  from  abroad,  the  consumer  in  gen- 
eral 2  bears  the  burden  of  the  tax.  It  will  therefore  often 
happen  that  such  indirect  taxation  absorbs  a  greater  part 
of  the  smaller  incomes  than  of  the  larger  incomes.  Such 
inequality  sins  against  the  canon  of  distributing  public 
burdens  in  proportion  to  each  taxpayer's  ability,  and 
may  therefore  be  redressed,  in  part,  by  an  income  tax 
exempting  the  lower  incomes  ^  or  abating  the  rate  of 
income  tax  imposed  thereon.  How  far  existing  in- 
equalities of  taxation  may  be  redressed  by  an  income 
tax  will  depend,  of  course,  upon  conditions  peculiar  to 
each  nation.  It  is  worthy  of  notice,  however,  that  very 
serious  injustice  may  be  perpetrated  by  this  compensa- 
tory scheme.  It  may  happen,  it  sometimes  has  hap- 
pened, that  while  the  income  tax  has  redressed  inequali- 
ties  as  between  the  recipients  of  the  largest  and  the 

*  Bastable.  Public  Finance,  p.  451  sq.  Bastable  admits,  how- 
ever, that  "  Italian  finance  has  found  a  powerful  source  in  this 
form  of  taxation." 

'  See  p.  174. 

'Jevons  estimated  that  in  England  families  with  incomes  of 
£40  paid  in  taxes  10%  of  their  income;  families  with  incomes  of 
£85,  8.2%;  families  with  incomes  of  £500,  8%.  See  also  CliflFe 
Leslie's  Essays,  p.  393  sq.;  also  Buxton,  Finance  and  Politic*, 
Vol.  I.,  p.  311. 


1 88  THE  INCOME   TAX. 

smallest  incomes,  this  gain  has  been  purchased  by  un- 
duly burdening  the  moderately  low  incomes.  The 
heaviest  burden  in  England  once  fell,  as  Sir  James 
Graham  expressed  it,  "  where  the  fustian  jacket  ends  and 
the  cloth  coat  begins." 

"  There  is  no  class  of  the  community,"  said  Mr.  Lowe 
in  1872,  "  who  are  so  severely  pinched  by  taxation  as 
the  lower  class  of  income  taxpayers.  Everything  seems 
to  hit  them ;  they  pay  income  tax,  they  pay  house  tax, 
and  their  principal  consumption  is  the  consumption  of 
articles  on  which  taxes  are  and  still  will  be  retained. 
Iheir  tea,  their  cofifee,  their  sugar,  their  spirits,  theii 
beer,  all  contribute  to  the  taxes,  and  then  they  are  heav- 
ily amerced  in  taxation  in  the  shape  of  local  rates.  I 
do  not  think  that  any  class  pay  so  much  as  the  poorer 
part  of  the  income  taxpayers."  ^ 

Naturally  enough,  it  is  proposed  to  obviate  this  injus- 
tice by  abatements  in  the  tax  rate  on  the  smaller  in- 
comes, or  by  a  progressive  rate  of  taxation  upon  all 
incomes.  But  the  productivity  of  the  tax  will  sufifer 
thereby,  and  its  effective  enforcement  will  be  somewhat 
impaired.  Still,  when  everything  is  said  by  way  of  al- 
lowance, it  must  be  conceded  that  an  income  tax  gen- 
erally serves  to  modify  the  injustice  of  the  tax  burden 
which  indirect  taxes  invariably  create. 

Besides  redressing  the  inequalities  of  taxation,  an  in- 
come tax,  it  is  often  maintained,  serves  as  a  most  useful 
fiscal  instrument  quickly  available  in  times  of  war — "  a 
third  line  of  defence,"  as  it  has  been  termed — and  capa- 
ble also  of  quickly  making  good  a  deficit  in  times  of 
peace.  The  English  income  tax  has  acted  as  a  buffer, 
serving  at  one  time  to  obviate  deficits,  and  again  as  an 
easy  means  of  relaxing  the  strain  on  the  taxpayer  when 

'Buxton,  Finance  and  Politics,  Vol.  I.,  p.  311. 


GENERAL   CHyiRACTERlSTlCS  OF  INCOME  TAXES.    189 

a  surplus  of  revenue  seemed  probable.  The  utility  of 
such  a  tax  in  time  of  war  cannot  be  gainsaid,  for,  with 
the  administrative  machinery  in  running  order,  no  source 
of  revenue  responds  more  quickly  to  present  needs,  or 
yields  supplies  more  steadily,  than  a  tax  on  incomes.  Less 
can  be  said  on  the  score  of  using  the  tax  as  an  easy  means 
of  securing  equilibrium  between  current  receipts  and  ex- 
penses. In  England  alone  is  the  annual  rate  of  income 
taxation  readily  variable,  and  that  possibility  involves 
with  it  the  English  system  of  responsible  cabinet  gov- 
ernment, which,  be  its  merits  what  they  may,  is  not 
likely  to  be  speedily  domesticated  in  the  United  States 
or  (in  its  genuine  form)  on  the  Continent. 

The  defects  of  income  taxes  cannot  be  deftly  covered 
up  by  remarking  that  an  income  tax  is  but  a  part  of  a 
system  of  taxation,  and  by  suggesting  that  its  imperfec- 
tions may  all  be  made  good  by  the  other  taxes  in  the 
system.  The  glaring  defect  in  an  income  tax  is  that 
much  real  income  never  is  and  never  can  be  discovered 
and  taxed.  The  principle  of  stoppage  at  the  source, 
where  applicable,  is  an  admirable  expedient  for  prevent- 
ing evasion,  but  no  income  tax  ever  devised  can  prevent 
fraud  when  the  taxpayer  is  allowed  or  required  to  dis- 
close his  own  income.  This  is  deplorable,  perhaps  de- 
rogatory to  the  dignity  which  hedges  the  citizen,  but  it 
is  demonstrably  true,  and  is  not  likely  to  change  yet 
awhile.  If  the  tax  officials  arv>  charged  with  ascertain- 
ing the  income  of  the  contributor,  the  result  will  be  the 
same — much  income  will  escape— and  the  taxpayer's  ir- 
ritation will  nevertheless  be  great.  If  certain  legal  pre- 
sumptions are  relied  upon,  such  as  the  amount  paid 
annually  for  rent,  the  result  must  be  arbitrary  and  vexa- 
tious, while  much  income  will  not  only  not  be  disclosed, 
but  will  be  permanently  hidden  as  it  were  behind  a  screes 


tgc>  The  Income  tax. 

erected  by  law.  If  one  is  asked  what  is  the  remedy  fof 
this  inevitable  defect  in  income  taxes,  the  answer  is  that 
there  is  none.  To  suggest  the  general  property  tax  as 
a  remedy — even  as  a  complementary  remedy  to  the  in- 
come tax — shows  little  knowledge  of  the  true  inwardness 
of  taxation.  The  two  taxes  taken  together,  if  they  are 
fairly  administered,  may  conceivably,  under  certain  cir- 
cumstances, be  better  than  either  by  itself,  but  to  sug- 
gest that  they  "  realize  justice  "  is  certainly  to  adopt  a 
complaisant  view  of  finance.  The  other  view,  that  jus- 
tice in  taxation  can  never  be  realized  except  in  a  very 
moderate  degree,  is  not  pleasant  either,  but  on  the  other 
hand  is  rather  nearer  the  truth. 

The  alleged  defect  of  an  income  tax  as  it  is  gener- 
ally set  down  in  works  of  finance,  is  its  failure 
to  discriminate  between  different  kinds  of  income. 
There  seems  to  be  a  tolerably  general  acquiescence 
in  the  dictum  that  temporary  incomes  ought  to  be 
taxed  at  a  lower  rate  than  permanent  incomes,  and 
that  incomes  from  personal  exertions  at  a  lower  rate 
than  incomes  from  property.^  Leaving  for  the  moment 
the  source  of  income  out  of  the  question,  it  is  certain  that 
no  reason  exists  for  the  gentler  treatment  of  temporary 
incomes  than  of  permanent  incomes — if  indeed  there  be 
any  permanent  incomes.  The  income  received  for  ten 
years  is  taxed  only  so  long  as  it  is  received,  and  if  an- 
other income  accrues  for  thirty  years  it  must  bear  its 
burden  for  the  longer  period. 

Whether  property  incomes  should  be  treated  in  a  dif- 
ferent way  from   exertion  incomes   is  a   more  difficult 

L'impot  generale  sur  le  revenue  doit  demander  une  moindre 
quote  part  aux  revenues  aleatoires,  perissables  et  provenant  de 
I'activite  personelle,  qu'aux  revenues  fixes,  certains,  perpetuels, 
qui  proviennent  d'un  capital  accumule."  Leroy-Beaulieu, 
Traite  des  Finances,  Vol.  I.,  p.  445. 


INCOME   TAXES  IN   THE  UNITED  STATES.  191 

question.  If  the  different  rates  were  practicable,  that  is, 
if  the  distinction  could  be  made  without  leading  to  grave 
administrative  difficulties, — which  is  doubtful, — or  if  the 
higher  rate  on  property  incomes  served  only  as  a  coun- 
terweight to  the  presumed  evasion  of  taxes  rightly  due 
by  property  owners  as  a  class,  something  might  be  said 
for  the  proposed  plan  of  discrimination.  But  if  it  is  to 
the  interest  of  society,  as  well  as  of  the  individual,  that 
property  should  be  accumulated,  the  amercing  of  in- 
comes derived  from  property  at  a  higher  rate  than  those 
springing  wholly  from  personal  exertions  would  seem 
to  be  a  curious  incentive  to  offer  men  to  amass  durable 
property.  Such  discrimination  in  taxing  the  two  kinds 
of  income  would  act  in  part  as  a  premium  upon  such 
production  as  takes  the  form  of  goods  that  perish  wholly 
in  the  using. 

Income  Taxes  in  the  United  States. — The  story  of 
income  taxes  in  the  United  States  cannot  be  invested 
with  much  novelty.  It  has  been  thoroughly  exploited, 
and  that  recently.^  The  only  effect  invariably  produced 
by  the  study  of  the  subject,  whatever  be  one's  personal 
views,  is  multitudinous  irritation.  DifHcUe  non  scribere 
satiram  might  have  been  truthfully  written  of  this  theme. 
There  is,  however,  in  the  first  place,  no  demurrer  to  the 
verdict  that  the  state  income  tax,  as  it  exists  in  three 
commonwealths  (Virginia,  Massachusetts,  and  North 
Carolina)  is  a  mockery.  Whether  the  federal  war  in- 
come tax  was  a  success  depends  largely  upon  the  con- 
ception one  holds  of  success  in  matters  financial.  But 
it  will  hardly  be  worth  our  time  in  this  place  to  follow 
the  serpentine  windings  of  the  legislation  which  shaped 

*  See  Professor  Dunbar's  article  in  the  Quarterly  Journal  of 
Economics,  Vol.  IX.;  also  Professor  Seligiiwn's  article  in  the 
E<jononiic  Journal,  Vol.  IV, 


19*  THE  INCOME    T/iX. 

and  reshaped  the  war  income  tax.^  Congress  in 
i86l  committed  the  nation,  temporarily  at  least, 
to  the  policy  of  taxing"  incomes,  and  for  over  ten  years 
(from  1863  to  1873,  both  inclusive)  receipts  from  income 
taxes  figured  among  the  federal  revenues.  The  last 
lease  of  life  accorded  the  tax  was  a  two-year  extension 
decreed  in  1870.  After  1873  this  source  of  supply  dried 
up  completely. 

Into  the  ever-changing  details  concerning  the  tax 
rate,  the  progressive  charges  on  higher  incomes,  the  limit 
of  exemptions,  and  the  methods  of  enforcement,  it  would 
be  profitless  here  to  enter.  Suffice  it  to  say  that  the 
highest  rate  ever  in  force  was  10  per  cent.,  the  lowest 
2^  per  cent.,  while  the  exempted  incomes  varied  from 
$600  to  $2000.  The  highest  yield  for  any  one  year  was 
$72,982,159  in  1866.  Perhaps  of  more  significance  than 
anything  about  the  war  income  tax  is  the  fact  that, 
though  Gallatin  had  suggested  such  an  expedient  at  the 
time  of  the  second  war  with  Great  Britain,  the  federal 
government  had  never  before  employed  such  a  fiscal 
agency.  It  was  only  one  instance  of  the  high-water 
mark  of  the  doctrine  of  federal  powers.  The  law's  re- 
peal was  due  to  its  unpopularity  in  the  older  and  wealth- 
ier parts  of  the  country,  to  the  receding  wave  of  cen- 
tralization, and  to  the  reduced  expenses  resulting  from 
the  establishment  of  peace.  Almost  a  quarter  of  a  cen- 
tury elapsed  before  another  income  tax  was  placed  upon 
the  federal  statute-book. 

Most  histories  of  the  income  tax  of  1894  begin  with 
some  reference  to  the  '  mandates '  of  1890  and  1892. 
A  *  mandate '  is  what  the  politicians  of  the  successful 

'  A  thorough  study  of  the  Civil  War  Income  Tax  by  Mr.  Jos. 
A.  Hill  is  to  be  found  in  the  Quarterly  Journal  of  Econpniies. 
Vol.  VIII.,  p.  416  sq. 


INCOME   TAXES  IN   THE   UNITED  STATES.  193 

party  think  the  electorate  wants,  when  the  majority  in 
the  last  election  has  been  decisive.  Such  mandates  might 
serve  as  useful  indices  of  the  trend  of  public  opinion, 
if  the  electorate  had  not  as  many  minds  as  an  old  woman, 
and  did  not  change  them  as  frequently.  But  however 
this  may  be,  the  inference  from  the  general  elections, 
congressional  and  presidential,  in  the  years  above  men- 
tioned, seemed  very  obvious.  General  Harrison  had 
been  elected  on  the  issue  of  protection,  and  the  Mc- 
Kinley  Tariff  bill  was  certainly  a  vigorous  redemption 
of  party  and  platform  pledges.  The  success  of  the 
Democrats  in  1890  and  1892  could  be  construed  only 
as  a  popular  condemnation  of  the  principle  of  protection, 
and  accordingly  the  Democratic  party  leaders  in  1893-4 
began  to  shape  a  measure  which  would,  as  they  hoped, 
accord  with  the  views  of  the  majority  of  the  people,  as 
indicated  in  the  election  of  Mr.  Cleveland  and  a  Demo- 
cratic Congress.  The  crisis  of  1893,  whose  causes  are 
still  a  matter  of  dispute,  came  in  to  complicate  the  prob- 
lem, and  the  early  repeal  of  the  silver  purchase  clause  of 
the  Act  of  July  14,  1890,  sowed  the  seeds  of  dissension 
in  the  then  dominant  party.  The  dilemma  which 
now  confronted  the  Democrats  was  to  redeem  their 
pledges  to  scotch  the  principle  of  protection,  and  at  the 
same  time  to  obtain  adequate  revenue  to  carry  on  the 
government,  for  the  deficit  under  the  last  year  of  the 
McKinley  bill,  owing  largely  to  the  dwindling  volume  of 
imports,  was  taking  on  portentous  dimensions.  It  soon 
became  evident  that  there  were  two  very  divergent  ele- 
ments that  had  been  consolidated  under  the  Democratic 
standard.  There  was  the  old-time  conservative  body 
whose  hereditary  economic  ideal  was  free  trade  (tariff 
for  revenue  only)  and  hard  money.  There  was  also  the 
faction    of    discontent,    especially    in    the    farming   ^eg- 


194  THE  INCOME   T/tX. 

tions  of  the  South  and  West,  whose  grievance  was  the 
absence  of  such  prosperity  as  they  felt  themselves  en- 
titled to,  and  who  opposed  protection,  not  so  much  be- 
cause of  any  very  carefully  reasoned  economic  convic- 
tions, but  because  it  was  a  tangible  part  of  a  system 
under  which  they  did  not  seem  to  thrive.  The  two 
branches  could  unite  readily  as  a  party  of  opposition, 
but  harmony  in  constructive  legislation  was  to  be  ob- 
tained only  at  a  great  cost.  The  radical  section  de- 
manded that  the  tariff  measure  should  redress  the 
grievances  of  the  South  and  West.  These  parts  of  the 
country  were  largely  agricultural.  They  sold  in  a  free 
market  and  bought  in  a  protected  market.  The  South. 
moreover,  was  in  a  still  greater  plight  than  the  West,  for 
no  considerable  part  of  the  lavish  pension  expenditure  of 
the  federal  government  drifted  back  to  the  South,  to  alle- 
viate the  tax  burdens  it  bore.  The  temper  of  the  House 
was  aroused.  It  was  not  so  much  the  yield  of  the  new 
revenue  measure  that  concerned  that  body  (as  may  be 
judged  from  the  way  in  which  it  rejected,  at  first,  the 
revenue  duty  on  sugar),  but  it  was  upon  a  redistribution 
of  the  burden  of  federal  taxation  that  the  House  was 
bent.  The  income  tax  became  an  integral  part  of  the 
Wilson  bill,  which  was  passed  and  sent  to  the  Senate. 
Here  the  House  measure  was  subjected  to  a  merciless 
revision,  generally  in  the  direction  of  lessening  the 
breaches  the  original  bill  had  made  in  the  protective 
system,  and  also  in  the  direction  of  increasing  the  total 
revenue  to  be  derived  from  customs  duties.  The  in- 
come tax  provisions,  though  opposed  by  the  senior 
Democratic  senator  from  New  York,  remained  intact, 
though  limited  to  live  years'  duration,  and  the  re- 
modelled measure  was  forced  upon  a  reluctant  House 
and    became    lavv    without    the    President's    signature. 


INCOME   TAXES  IN   THE   UNITED  STATES.  195 

What  the  result  might  have  been  had  the  law  gone  into 
operation  can  only  be  surmised.  But  the  Supreme 
Court,  in  May  of  the  next  year  (1895),  first  maimed  and 
then  destroyed  the  tax  by  pronouncing  it  unconstitu- 
tional. Perhaps  no  more  pregnant  decision  was  ever 
handed  down  from  that  tribunal,  for,  be  its  future 
efifects  what  they  may,  the  abolition  of  the  tax  took 
from  the  administration  its  last  financial  resource,  aggra- 
vated the  deficits  that  were  already  become  chronic, 
split  the  two  wings  of  the  Democracy  into  factions  hope- 
lessly embittered,  and,  as  much  as  any  other  one  thing, 
made  the  question  of  the  free  coinage  of  silver  the  issue 
in  the  presidential  campaign  of  1896. 

Voltaire  once  remarked  about  some  tax  law  that  no 
burden  the  law  imposed  could  be  compared  with  the 
burden  of  reading  the  law  through,  and  the  remark 
seems  apposite  after  one  has  perused  Sections  27-36,  in- 
clusive, of  "  An  Act  to  reduce  taxation,  to  provide  rev- 
enue for  the  government,  and  for  other  purposes," 
passed  by  Congress  August  15,  1894,  and  popularly 
known  as  the  Wilson  bill.  The  sections  above  referred 
to  were  those  which  provided  for  the  taxation  of  in- 
comes. They  required  that  a  tax  of  2  per  cent,  on  net 
incomes  ^  should  be  paid  on  or  before  July  i,  1895,  and 
each  year  for  four  years  thereafter.  The  basis  on  which 
the  estimate  was  to  be  made  was  upon  the  income  for 
the  calendar  year  preceding.  Private  incomes  enjoyed 
an  abatement  of  $4000,  although  the  incomes  of  corpora- 


*  In  estimating  incomes,  deductions  were  allowed  for  neces- 
sary expenses  of  production,  for  interest  paid,  for  losses  by  fire, 
shipwreck,  and  for  taxes  paid  (except  against  local  improve- 
ments); the  incomes  of  charitable  and  educational  institutions, 
building  associations,  mutual  insurance  companies,  federal 
bondholders,  and  certain  savings  banks  were  exempt  from  tax- 
ation. 


19^  THE  INCOME   TAX. 

tions  were  permitted  no  such  privilege.  The  assessment 
and  collection  of  the  tax  were  intrusted  to  the  internal 
revenue  officials,  and  minute  provisions  were  made  for 
the  collection  of  returns,  the  exaction  of  sworn  state- 
ments, the  imposition  of  penalties,  the  conduct  of  appeals, 
and  the  enforcement  of  secrecy,  which  was  enjoined  upon 
the  administrative  staff.  Individuals  were  required  to  re- 
turn upon  oath  their  total  incomes.  The  principle  of 
stoppage  at  the  source  was  applied  sparingly, — only  to 
government  salaries  and  to  corporation  dividends,  but 
not  to  the  interest  on  corporate  indebtedness.^  Another 
curious  feature  was  that  inheritances  of  personal  prop- 
erty were  included  as  income  for  the  year  in  which  the 
inheritance  was  received. 

Criticism  of  the  Income  Tax  Law  of  1894. — After  the 
income  tax  law  of  1894  had  been  introduced  into  Con- 
gress and  had  ceased  to  provoke  surprise,  it  naturally  be- 
gan to  excite  praise  or  vituperation,  as  the  case  might  be, 
and  shortly  thereafter  the  period  of  naive  criticism  be- 
gan. The  supporters  of  the  tax  often  contented  them- 
selves with  the  deliverance  that  income  was  the  fairest 
index  of  taxpaying  ability, — a  generality  rather  trite  at 
best,  and  in  this  instance  wholly  inconclusive.  The  op- 
ponents of  the  tax  rushed  at  the  $4000  exemption  clause, 
and  pronounced  the  measure  "  a  tax  on  thrift  "  and  es- 
sentially socialistic.  The  innocent  assumption  underly- 
ing this  assertion  was  that  prior  to  this  tax  the  equities 
of  tax  distribution  had  been  so  nicely  adjusted  that  any 
addition  to  our  taxes  must  throw  the  delicate  tax  mech- 
anism wholly  out  of  equilibrium.  Some  opponents  of 
the  tax  contended  that  the  tax  was  "  inquisitorial."  If, 
as  Doctor  Johnson  once  remarked,  "  patriotism  is  the 
last  refuge  of  a  scoundrel,"  "inquisitorial  taxation"  is 

*  Such  as  corporation  bonds. 


CRITICISM  OF  THE  INCOME   T/1X  LAIV  OF  1894.     ^97 

likely  to  be  the  first  objection  raised  by  a  reluctant  tax- 
payer. The  same  objection  when  brought  against  the 
war  income  tax — and  with  much  better  reason  ^ — was 
readily  met  by  Commissioner  Delano,  who  answered 
that  he  did  not  see  why  this  objection  might  not,  with 
equal  force,  be  urged  against  all  taxes  on  personal  prop- 
erty. "  Such  taxes,"  said  he,  "  cannot  be  collected  with- 
out ascertaining  the  amount  of  taxable  property  pos- 
sessed by  the  taxpayer.  The  law  imposing  a  tax  on  in- 
come does  nothing  more  than  this,  if  so  much."  2 

Of  course  any  adequate  estimate  of  the  income  tax 
involves  the  careful  weighing  of  a  number  of  considera- 
tions. Perhaps  the  question  first  worth  asking  is  whether 
the  tax  would  have  yielded  the  adequate  amount  of  rev- 
enue needed  at  the  time  it  was  passed.  The  Statistician 
of  the  Treasury  Department  made  an  estimate  while  the 
bill  was  pending  that  the  tax  would  yield  the  first  year 
not  less  than  12  nor  more  than  39  millions  of  dollars, 
and  expressed  himself  as  thinking  that  the  lower  limit 
was  nearer  the  probable  yield.  This  was  not  borne  out 
by  the  returns  made  to  the  Internal  Revenue  Depart- 
ment, for,  even  after  the  tax  on  rentals  had  (owing  to  the 
first  decision  of  the  court)  been  given  up,  it  was  antici- 
pated that  the  residual  yield  would  be  in  the  neighbor- 
hood of  15  millions,  so  that  had  this  tax  stood  intact 
it  might  very  likely  have  yielded  30  million  dollars  a  year 
in  the  aggregate — a  sum  which  the  Treasury  sorely 
needed,  and  which  would  have  wiped  out  the  greater 
part  of  its  recurring  deficits.  Though  its  administrative 
defects,  therefore,  may  have  been  grave,  there  is  little 


^  Incomes  during  war  time  were  sometimes  printed  in  the 
newspapers  as  items  of  public  interest. 

'  BoUes,  Financial  History  of  the  United  States,  Vol.  III.,  p. 
406. 


198  THE  INCOME   TAX. 

to  be  said  against  the  tax  on  the  score  of  inadequacy- 
It  was  not  the  least  bitter  part  of  the  irony  of  fate  that 
the  income  tax,  which  the  Administration  accepted  only 
with  reluctance,  would  have  enabled  it  to  avert  its  hu- 
miliating deficits,  while  those  who  originally  proposed 
the  tax  designed  it  as  an  instrument  to  secure  equity  in 
taxation  rather  than  as  a  needed  source  of  supplementary 
revenue. 

The  tax  would  have  operated  also  to  reapportion  the 
burden  of  federal  taxation  more  equitably.  At  least 
there  is  very  good  reason  to  think  so.  Senator  John 
Sherman,  in  opposing  the  repeal  of  the  war  income  tax, 
said  truly  and  prophetically :  "  A  few  years  of  further 
experience  will  convince  the  body  of  our  people  that  a 
system  of  national  taxes  which  rests  the  whole  burden 
of  taxation  on  consumption,  and  not  one  cent  on  prop- 
erty or  income,  is  intrinsically  unjust.  It  will  not  do  to 
say  that  such  a  person  consumes  in  proportion  to  his 
means.  It  is  not  true.  Every  one  must  see  that  the 
consumption  of  the  rich  does  not  bear  the  same  rela- 
tion to  the  consumption  of  the  poor  as  the  income  of 
the  one  does  to  the  wages  of  the  other.  As  wealth  ac- 
cumulates this  injustice  in  the  fundamental  basis  of  our 
system  will  be  felt,  and  forced  upon  the  attention  of 
Congress."  1  Mr.  Sherman's  verdict  in  this  matter  was 
indisputable,  and  much  the  same  might  be  truly  afifirmed 
of  the  income  tax  law  of  1894.  Defects  in  the  measure 
there  were,  nor  were  they  few  in  number  or  of  slight  im- 
portance. The  principle  of  stoppage  at  the  source  might 
have  been  applied  more  extensively,  especially  to  the 
interest  paid  by  corporations  upon  their  bonded  indebt- 

'  Bolles,  Financial  History  of  the  United  States.  Vol.^  III.,  p. 
406.  It  is  also  rather  curious  to  note  that  Senator  Sherman 
pronounced  the  former  income  tax  "  the  most  just  and  equitable 
tax  that  is  now  levied  in  the  United  States,  without  exception." 


THE  INCOME   TAX  DECISION.  199 

edness.i  The  productivity  of  the  tax  was  markedly 
lamed  by  this  omission.  The  exemption  limit  of  $4000 
seemed  also  to  countenance  a  propaganda  of  confisca- 
tion, though  it  should  be  remembered  that  the  exemp- 
tion under  the  first  income  tax  was  finally  set  at  $2000. 
The  productiveness  of  the  measure  also  was  largely 
curtailed  by  this  high  exemption  limit,  and  by  the  con- 
sequent escape  of  the  larger  number  of  incomes  from 
taxation.  Some  of  the  privileges  accorded  to  incomes 
from  special  sources,  such  as  building  associations, 
rested  on  no  very  solid  ground,  while  the  taxation  of  all 
corporate  dividends  might  have  proved  a  hardship  to 
those  whose  incomes,  however  small,  were  derived  from 
such  sources.  The  inclusion  of  inherited  personal  estate 
as  income  for  the  year  in  which  the  property  fell  to  the 
heir  was  an  unwise  attempt  to  seize  upon  a  source  of 
income  best  left  to  the  commonwealths. 

It  would  be  an  unprofitable  task  to  inquire  whether 
the  considerations  in  favor  of  the  measure  outweighed 
those  advanced  against  it.  Many  who  thought  the  tax 
hopelessly  defective  from  an  administrative  standpoint 
regretted  the  decision  of  the  Supreme  Court,  for  fear  that 
in  case  of  war  we  should  be  deprived  of  an  almost  indis- 
pensable fiscal  agency.  But  it  is  not  certain  that  the 
war  spirit  may  not  in  future  so  far  penetrate  that 
court  as  to  lead  it  to  revoke  a  decision  which  came  as 
such  a  surprise  in  times  of  peace.  Though  we  may  not 
finally  be  able  to  do  without  an  income  tax,  we  could 
hardly  have  acquiesced  permanently  in  such  a  tax  as 
that  of  1894. 

The  Income  Tax  Decision.  —  The  decision  or,  more 
strictly,  the  decisions  of  the  Supreme  Court  which  killed 

^  Corporation  bonds  ought  to  be  classed  with  their  stock  as 
income  sources. 


206  THE  INCOME   TAX. 

the  Income  Tax  of  1894  made  a  great  deal  of  history, 
and  unmade,  or,  at  all  events,  remade,  a  good  deal  of  law. 
It  certainly  traversed  legal  expectation,^  it  jostled  the 
doctrine  of  stare  decisis,  it  contravened  previous  deci- 
sions, and  it  discredited  a  good  many  dicta  which  had 
already  become  '  blessed  words '  among  authoritative 
text  writers  and  accredited  authorities  on  constitutional 
law. 

The  status  of  the  case  was  as  follows :  A  certain  Mr. 
Pollock,  a  citizen  of  Massachusetts,  owned  stock  in  the 
Farmers'  Loan  and  Trust  Company,  a  New  York  cor- 
poration. Said  Pollock  requested  the  company  not  to 
disclose  income  or  pay  the  tax  voluntarily  upon  such  part 
of  its  income,  or  its  wards'  incomes,  as  might  be  derived 
from  land  or  rentals,  or  from  state  or  municipal  bonds. 
The  Farmers'  Loan  and  Trust  Company  declined  to  ac- 
cede to  this  request,  and  prepared  to  disclose  and  pay 
taxes  on  incomes  derived  from  the  sources  above  speci- 
fied. Thereupon  said  Pollock  brought  suit  in  the  Cir- 
cuit Court  of  the  United  States  for  the  Southern  District 
of  New  York,  and  prayed  for  equitable  relief,  asking 
that  the  Farmers'  Loan  and  Trust  Company,  in  accord- 
ance with  his  request,  be  restrained  from  complying 
voluntarily  with  the  income  tax  law,  which  he  asserted 
was  unconstitutional.  That  corporation  in  its  demurrer 
waived  the  point  of  adequate  remedy  at  law  as  by  man- 
danuisr  cited  want  of  c(|uity,  and  maintained  the  con- 

*  I  do  not  make  this  statement  entirely  upon  my  own  author- 
ity. While  the  decision  was  pending,  I  was  told  by  the  dean  of 
one  01'  the  largest  law  schools  of  New  York  City  that  the  metro- 
politan bar  expected  the  court  to  uphold  the  constitutionality 
of  the  law. 

"  Equity  cannot  be  invoked  so  long  as  there  is  an  adequate 
remedy  at  law,  but  a  mandamus,  if  issued,  could  have  required 
the  corporation  to  pay  under  protest.  The  Revised  Statutes 
(§  3224)  prohibit  federal  courts  from  entertaining  suits  for  stop- 
ping the  assessment  or  collection  of  taxes. 


THE  INCOME    TAX  DECISION.  201 

stitutionality  of  the  law.  The  case  was  dismissed  by 
the  Circuit  Court  on  demurrer,  and  thereafter,  as  involv- 
ing the  constitutionality  of  a  federal  statute,  was  ap- 
pealed to  the  Supreme  Court.  First,  in  March,  the  case 
was  argued  by  a  distinguished  array  of  counsel  before 
that  body,  which  handed  down  its  first  decision  April  8, 
1895,  and,  after  a  rehearing  before  a  full  bench,  its  final 
decision  in  the  following  May.  The  appellant's  conten- 
tions were  essentially  these :  (i)  that  the  law  was  un- 
constitutional because  it  taxed  rentals  ;  this,  he  alleged, 
was  essentially  a  tax  on  real  estate,  which  was  a  direct 
tax  and  as  such  contravened  the  fourth  clause  of  Sec- 
tion 9  (Article  I)  of  the  Constitution,  which  provides 
that  direct  taxes  shall  be  laid  "  in  proportion  to  the 
census  or  enumeration  "  therein  provided  for.  The  law, 
it  was  contended,  violated  also  the  third  clause  of  Sec- 
tion 2  (Article  I),  which  decrees  that  "  direct  taxes  shall 
be  apportioned  among  the  several  states  .  .  .  according 
to  their  respective  numbers,"  etc.  It  was  claimed  (2) 
that  the  law  was  unconstitutional  because  it  taxed  in- 
come from  personal  property ;  this  also,  it  was  con- 
tended, was  essentially  a  direct  tax,  and  thus  contravened 
the  same  constitutional  provisions.  Moreover,  the  allega- 
tion was  made  (3)  that  the  law  was  unconstitutional  be- 
cause, even  if  not  a  direct  tax,  it  was  repugnant  to  the  first 
clause  of  Section  8  (Article  I),  which  provides  that  "  all 
duties,  imposts,  and  excises  shall  be  uniform  through- 
out the  United  States  "  (the  "  uniform  "  requirement, 
it  was  alleged,  was  sinned  against  by  the  $4000  exemp- 
tion and  the  exemption  of  certain  specified  classes  of 
incomes).  Lastly  it  was  contended  (4)  that  the  law  was 
unconstitutional  and  void  because  the  tax  imposed  on 
incomes  derived  from  state  and  municipal  bonds  was 
an  unwarrantable   transgression   upon  powers  reserved 


202  THE  INCOME    TAX. 

to  the  states  in  Articles  IV  and  V  of  the  Constitu- 
tion.^ 

The  last  contention  was  practically  conceded  by  the 
government  and  may  be  dismissed  without  comment. 
Such  incomes  as  thus  escaped  the  income  tax  would  have 
lessened  the  aggregate  yield  of  the  tax  to  no  very  damag- 
ing extent.  The  third  contention,  that  of  lack  of  "  uni- 
formity," finally  hinged  upon  the  construction  put  on 
the  two  prior  contentions.  The  uniformity  required  by 
the  Constitution  had  been  generally  interpreted  as  a 
mere  geographical  uniformity.  If  the  indirect  effect  of 
the  law  was  to  tax  certain  sections,  notably  the  northeast- 
ern, more  severely  than  the  others,  it  would  seem  to 
follow  that  import  duties  imposed  on  goods  mainly  or 
wholly  consumed  in  certain  sections  are  unconstitu- 
tional. But  this  was  not  the  pivotal  point  of  the  battle. 
The  point  which  the  assailants  of  the  law  chiefly  at- 
tacked was  the  direct  nature  of  the  tax.  Boiled  down, 
the  argument  against  the  law  was  this :  the  income  tax 
is  a  direct  tax ;  it  is  not  apportioned  to  population,  as 
the  Constitution  provides  direct  taxes  must  be ;  it  is 
therefore  unconstitutional  and  void.  Perhaps  never  be- 
fore was  a  phrase  more  twisted  than  the  phrase  "  direct 
taxation."  The  most  desperate  attempts  were  made  to 
discover  some  definite  and  consistent  meaning  that  must 
inevitably  attach  to  the  term  direct  tax. 

It  is  one  of  the  costs  of  a  peaceful  civilization  ruled  by 
courts  of  justice,  that  grave  issues  sometimes  take  a  shape 
which  the  traditional  "visitor  from  Mars"  would  find  hard 
to  view  with  any  measurable  amount  of  gravity.  Here 
were  two  sections  of  a  nation,  each  trying  to  unload  on 

*  Neither  Congress  nor  the  states  may  tax  an  official  agency 
of  the  other.  To  allow  this,  if  the  nominal  tax  were  exorbitant, 
would  destroy  or  weaken  the  autonomy  of  the  federal  govern- 
ment or  that  of  the  states. 


THE  INCOME    TAX  DECISION.  203 

the  other  a  burden  of  taxation,  and  the  issue  was  finally 
to  turn  on  the  interpretation  of  a  single  phrase.  It  is 
sometimes  lucky,  however,  that  a  nation  can  afTord  to 
seem  ridiculous.  It  is  cheaper  than  fighting,  and  by  far 
more  comfortable. 

At  the  first  hearing  of  the  case  the  Attorney-General, 
Mr.  Olney,  in  behalf  of  the  government,  was  inclined 
to  treat  the  contention  that  the  income  tax  was  a  direct 
tax  (in  the  constitutional  sense  of  the  term)  rather  cava- 
lierly. He  declared  that  "  whether  an  income  tax  is 
what  the  Constitution  describes  as  a  '  direct  tax  '  is  a 
question  as  completely  concluded  by  repeated  adjudica- 
tions as  any  question  can  be.  It  is  not  a  direct  tax 
within  the  meaning  of  the  Constitution,  unless  five  con- 
curring judgments  of  the  Supreme  Court  have  all  been 
erroneous."  This  was  unquestionably  the  view  of  most 
authorities  on  constitutional  law.  Judge  Cooley  in  his 
work  on  The  Law  of  Taxation  (p.  8)  had  explained  the 
phrase  as  follows : 

"  Question  has  several  times  been  made  as  to  the 
meaning  of  the  term  direct  taxes  as  thus  employed.  It 
was  held  in  an  early  case  that  a  tax  on  carriages,  by 
number,  was  not  a  direct  tax  in  the  sense  of  the  Consti- 
tution, and  it  was  strongly  intimated  in  the  same  case 
that  only  capitation  taxes  and  taxes  on  land  should  be 
deemed  within  the  provision.  More  recently  it  has  been 
decided  that  a  tax  on  incomes  is  not  a  direct  tax.  Neither 
is  a  tax  of  a  specified  per  cent,  upon  the  circulation  of 
banks ;  nor  a  tax  upon  succession  to  realty  on  the 
death  of  its  owner.  And  the  intimation  of  the  earliest 
case  is  very  distinctly  affirmed  in  one  more  recently  de- 
cided where  a  tax  on  land  was  in  question."  ^     What 

'The  cases  referred  to  in  their  order  are:  (i)  Hylton  vs. 
U.  S.,  3  Dall.  171  ;  (2)  Pacific  Insurance  Company  vs.  Soule,  7 


204  THE   INCOME    TAX. 

the  meaninj^:  of  the  i-)hrasc  "  (Hrcct  taxes  "  was  in  the  con- 
stitutional convention  can  only  be  surmised.  Probably, 
like  most  other  terms  whose  content  has  not  been  sub- 
jected to  minute  scrutiny,  it  meant  one  thing  to  one 
member,  another  to  another,  and  nothing  at  all  to  a 
third.  Madison  has  recorded  that  "  in  the  course  of  the 
del)atcs,  and  after  the  motion  of  Mr.  Ellsworth  that  the 
first  census  be  taken  in  three  years  after  the  meeting  of 
Congress  had  been  adopted,  Mr.  King  asked  what  was 
the  precise  meaning  of  direct  taxation,"  and  added  sig- 
nificantly, "  No  one  answered." 

The  first  tentative  answer  came  in  1796,  when 
the  Supreme  Court,  some  of  whose  members  had 
been  also  members  of  the  constitutional  conven- 
tion, decided  the  case  of  Hylton  vs.  U.  S.  and  ex- 
pressed the  opinion  obiter  that  only  land  taxes  and  capi- 
tation taxes  were  direct  taxes  in  the  constitutional  sense 
of  the  term.  The  war  income  tax  had  also  been  tested 
before  the  Supreme  Court,  which  decided.  In  re  Pacific 
Insurance  Company  vs.  Soule,  that  a  tax  on  the  income 
of  an  insurance  company  was  not  a  direct  tax,  and,  In  re 
Springer  vs.  U.  S.,  that  an  income  tax  was  not  a  direct 
tax,  though  here  it  was  urged  that  the  income  sprang 
in  part  from  land.  Indeed,  both  sides,  in  1895,  were 
agreed  that  a  land  tax  was  a  direct  tax  in  the  view  of 
the  Constitution,  but  the  government  contended  that,  to 
constitute  a  land  tax,  land  must  be  taxed  immediately 
by  quantity  or  valuation,  while  the  appellants  declared 
that  a  tax  on  income  derived  from  land  was  a  land  tax 
and  therefore  a  direct  tax.  The  latter  was  the  view 
which  the  court  by  a  narrow  majority  adopted.  "  The 
name  of  the  tax,"  said  Chief  Justice  Fuller,  "  is  unim- 

Wall.  443;  (3)  Veazie  Bank  vs.  Fenno,  8  Wall.  533;  (4)  Sholey 
vs.  Rew.  23  Wall.  331;    (5)  Springer  vs.  U.  S.,  102  U.  S.  586. 


THE  INCOME    TAX  DECISION.  205 

portant.  The  real  question  is,  is  there  any  basis  on  which 
to  rest  the  contention  that  real  estate  belongs  to  one 
of  the  two  great  classes  of  taxes,  and  that  the  rent  or 
income  which  is  an  incident  of  its  ownership  belongs  to 
the  other  ?  We  are  unable  to  perceive  any  ground  for 
the  alleged  distinction."  All  that  a  layman  can  say  in 
answer  to  this  way  of  putting  the  case  is  that  if  lawyers 
are  universally  to  begin  to  lay  aside  all  verbal  distinc- 
tions which  enshrine  precedents  and  no  longer  follow 
their  ancestral  wont  of  discriminating  between  the  tem- 
ple and  the  gold  of  the  temple,  the  altar  and  the  gift 
thereupon,  there  is  a  large  amount  of  law  which  is  in  a 
pretty  "  parlous  "  state. 

Mr.  Justice  White's  dissenting  opinion  commended 
itself  to  the  judgment  of  more  than  one  jurist  of 
repute.  "  Here,  then,"  says  he,  "  is  the  dilemma :  if 
the  framers  [of  the  Constitution]  understood  the 
meaning  of  the  word  direct,  the  practical  effect  which 
they  gave  to  it  should  remain  undisturbed ;  if  they  were 
in  doubt  as  to  its  meaning,  the  interpretation  long  since 
authoritatively  affixed  to  it  should  be  upheld.  .  .  .  The 
opinions  in  the  Hylton  case,  so  often  approved  and  re- 
iterated, the  unanimous  view  of  the  text  writers,  all  show 
that  a  tax  to  be  direct  must  be  an  assessment  of  the  land 
itself,  either  by  quantity  or  valuation.  Here  there  is  no 
such  assessment."  At  the  first  hearing  of  the  case  eight 
justices  sat  in  banco.  They  declared  the  tax  on  incomes 
derived  from  rent  and  from  state  bonds  unconstitu- 
tional, and  divided  evenly  on  the  issue  of  the  constitu- 
tionality of  taxing  other  incomes.  When  the  case  was 
reheard  before  a  full  bench  of  nine  justices  the  constitu- 
tionality of  the  tax  on  all  sources  of  income  was  denied, 
inasmuch  as  the  prior  elimination  of  the  tax  on  rent  in- 


2o6  THE  INCOME   TAX. 

comes  had,  in  the  opinion  of  the  majority  of  the  court, 
fatally  destroyed  the  orifj;-inal  intent  of  the  law. 

The  deliverance  of  the  court  can  be  explained  only 
by  reference  to  what  has  been  happily  termed  "  psycho- 
logical climate."  No  one,  in  his  senses,  dreamt  of  im- 
pugning the  scrupulous  honesty  of  our  highest  judicial 
tribunal.  Still,  there  were  but  few  who  had  expected 
a  decision  which  ran  in  the  teeth  of  dicta  and  precedents, 
and  the  efifect  produced,  even  upon  those  who  person- 
ally had  every  reason  for  detesting  the  tax,  was  that  of 
surprise,  none  the  less  intense  because  very  welcome. 
The  Supreme  Court  had  reversed  its  own  decision  be- 
fore, but  except  in  the  legal  tetider  cases  no  modern 
decision  had  been  reversed  which  bore  very  directly 
upon  the  stirring  political  issues  of  the  day.  But  the 
court  evidently  had  not  been  appealed  to  in  vain  upon 
the  issue  that  the  tax  was  a  stride  towards  socialism, 
and  the  "  weightier  matters  of  the  law  "  seemed  to  have 
been  forgotten  under  the  shadowy  sense  of  dread  which 
the  dim  spectre  of  socialism  invoked.  The  most  venera- 
able  member  of  the  court  gave  emphatic  utterance  to 
the  feeling  which  moved  him.  "  The  present  assault 
upon  capital,"  said  Mr.  Justice  Field,  "  is  but  the  begin- 
ning. It  will  be  but  the  stepping-stone  to  other,  larger 
and  more  sweeping,  till  our  political  contests  will  be- 
come a  war  of  the  poor  against  the  rich,  a  war  constantly 
growing  in  intensity  and  bitterness."  Whether  the 
prophecy  come  true  or  not,  it  is  at  least  open  to  question 
whether  the  decision,  like  the  famous  Dred  Scott  de- 
cision, may  not  contribute  to  bring  about  the  very  end 
it  sought  so  sedulously  to  avoid. 


CHAPTER   IX. 

PUBLIC  INCOME   FROM   QUASI-ECONOMIC 
SOURCES. 

The  Contractual  Income  of  the  State. — It  is  not  alone 

through  the  drastic  agency  of  positive  law  which  always 
stands  behind  the  tax  collector  that  the  entire  income  of 
the  state  is  obtained.  Alongside  the  state  as  a  master, 
stands  the  state  as  a  business  agency ;  and  though  no 
two  characters  may  seem  less  compatible  than  those  of 
"  sovereign  "  and  "  trader,"  no  state  confines  itself  exclu- 
sively to  either.  Just  as  an  individual  derives  his  income 
from  his  property  or  his  labor,  so  the  government  sup- 
plements its  income  from  taxation  by  such  receipts  as 
it  may  obtain  for  the  use  of  public  property  or  for  the 
performance  of  public  services.  The  public  lands  figure 
among  the  resources  for  meeting  public  expenditure, 
and  the  charges  for  postal  services  remind  us  daily  that 
not  all  we  pay  into  the  coffers  of  the  public  treasury 
stands  itemized  on  our  tax  duplicate.  The  quasi-eco- 
nomic income  of  the  state,  then,  will  comprise  such  rev- 
enues as  accrue  to  the  fisc  from  all  sources  except 
taxation ;  and  as  such  receipts  very  generally  presup- 
pose a  contract,  specific  or  implied,  between  the  state 
and  a  private  party,  we  may  lump  these  receipts  under 
the  head  of  "contractual  income."  ^ 

*The  subdivision  of  public  income  into  two  great  categories, 
tajc  income  and  contractual  or  quasi-economic  income,  has  many 

?o7 


2o8     PUBLIC  INCOME  FROM   QUASI-ECONOMIC  SOURCES. 

Looked  at  broadly,  ihc  contractual  income  of  the  state 
invites  a  double  treatment,  partly  descriptive,  partly  con- 
troversial. There  are  certain  fields  of  economic  activity, 
such  as  the  post-office,  which  custom  has,  as  it  were,  con- 
secrated to  government  administration.  Where  the 
state  through  long  experience  has  become  a  fairly  effi- 
cient industrial  agent,  the  task  of  the  financier  is  prac- 
tically narrowed  to  scanning  with  discrimination  such 
sources  of  public  income  and  testing  the  principles  upon 
which  they  are  based. 

There  are,  on  the  other  hand,  certain  enterprises  under 
private  management,  notably  the  business  of  transporta- 
tion in  the  United  States,  where  the  evils  resulting  from 
the  absence  of  ordinary  competition  are  alleged  to  re- 
quire the  extension  of  the  state's  industrial  functions. 
Where    economic    considerations    of    public    policy    are 

advantages;  and  considering  the  scope  of  this  work,  where  finan- 
cial categories  non  sunt  jmdtiplicanda,  is  all  but  inevitable.  The 
criteria  distinguishing  the  two  are:  (i)  the  machinery  of  collec- 
tion; (2)  the  somewhat  voluntary  character  of  contractual  in- 
come; and  (3)  the  cost  of  collecting  the  two  respectivclv. 
Quasi-economic  income  is  generally  collected  by  administrative 
agents  distinct  from  the  ordinary  revenue  or  tax  officials.  The 
time  of  the  payment  of  contractual  income  is  to  a  certain  extent 
at  the  option  of  the  payer,  though  this  is  also  true  with  reference 
to  indirect  ta.xes.  The  ratio  of  gross  receipts  to  net  receipts 
is  almost  always  greater  in  the  case  of  quasi-economic  income 
than  the  ratio  of  the  total  amount  of  taxes  collected  to  the  net 
yield  of  taxes  after  the  cost  of  their  collection  has  bcc-i 
deducted.  Seligman's  acute  distinctions^  between  taxes,  fees. 
2.nd  prices  (p.  302  sq.  Essays  in  Taxation)  would  involve  a  split- 
ting up  of  income  from  the  same  source  to  such  an  extent  as  t'^ 
make  necessary  a  very  intricate  arrangement  of  public  income 
sources, — a  point  well  urged  by  Bastable  (Public  Finance. 
2d  ed.,  p.  153  sq.,  note).  Special  assessments  are,  in  this  work, 
subsumed  under  taxes  though  differentiated  from  taxes  in  the 
ordinary  sense.  It  is  frankly  admitted  .that  certain  minor  public 
receipts,  such  as  registration  fees  and  penal  fines,  do  not  easily 
fall  under  either  taxes  or  contractual  revenue.  Such  receipts, 
however,  are  insignificant  in  amount. 


EXTANT  SOURCES   OF  CONTRACTUAL   INCOME.     209 

raised,  which  if  well  founded  would  necessitate  an  en- 
largement of  the  contractual  income  of  the  state,  the 
preliminary  economic  issue  must  first  be  disposed  of  be- 
fore the  financial  problem  can  well  be  attacked.  Ac- 
cordingly, we  shall  first  review  the  existing  sources  of 
the  state's  quasi-economic  income,  and  thereafter  pro- 
ceed to  the  question  of  investing  the  sovereign  with  en- 
hanced industrial  powers  and  duties. 

Extant  Sources  of  Contractual  Income. — (a)  Public 
Land. — Almost  all  states  still  hold  title  to  certain  lands 
from  whose  rental  or  sale  they  derive  a  certain  amount 
of  income.  Whether  there  was  ever  a  time  when  all 
land  was  held  in  common  or  tribal  ownership  is  a  vexed 
historical  problem,  but  certain  it  is  that  in  all  countries, 
with  the  progress  of  civilization,  the  public  lands  have 
tended  more  and  more  to  pass  into  private  possession. 
Bastable  cites  the  great  public  acreage  of  Russia  to  illus- 
trate "  the  statement  that  the  less  the  development  of' 
the  society  the  greater  is  the  proportion  of  public  land  " ; 
and  draws  the  evident  conclusion  that  "  the  function  of 
the  state  as  owner  of  agricultural  land  is  sure  to  decline 
in  importance  with  the  advance  of  society."  ^  This  fact 
points  to  one  of  the  sharpest  contrasts  between  feudal 
times  and  the  present  era,-  and  the  extension  of  private 
holdings  at  the  expense  of  the  public  domain  bears  signi- 
ficant witness  to  the  increased  economic  strength  im- 
parted to  the  state  by  the  more  careful  and  efficient 
cultivation  which  private  property  in  land  has  induced. 
The  recent  movement  for  the  nationalization  of  land  by 
the  absorption  of  land  rent  through  taxation,  whatever 
be  its  eventual  outcorre,  is  certainly  an  attempt  to  row 
against  the  stream  of  modern  tendency.     City  growth 

^  Public  Finance,  p.  160  and  p.  168, 
*  See  p.  l6, 


2  10     PUBLIC  INCOME  FROM   QL!/tSI-ECOhlOMIC  SOURCES. 

and  the  parallel  increase  in  urban  rents,  however,  have 
induced  some  financiers  (e.,cf.  Warner)  to  view  with 
favor  the  municipal  acciuisition  of  suburban  districts, 
while  others  think  the  retention  of  buildini;-  sites  when 
they  are  already  in  public  ownership  the  readiest  solution 
of  the  problem  of  taxing  ground  rents. ^  The  whole 
question  of  the  single  tax  on  land  rentals  is  treated  else- 
where, and  need  not  be  considered  here. 

The  public  domain  in  the  United  States  has  had  an 
historical  significance  that  can  hardly  be  underrated. 
Between  the  states  whose  perfect  union  was  at  fifet  only 
sketched  in  the  federal  constitution  the  public  lands 
created  the  unifying  tie  of  a  common  interest  in  a  future 
empire.  The  germ  of  nationality  was  to  ripen  with  the 
settlement  and  the  domination  of  those  vast  tracts  which 
lay  west  of  the  Alleghanies  to  the  Pacific.  It  was  there- 
fore wise  prevision,  pregnant  with  import,  that  led  the 
nation  speedily  to  open  up  this  territory  to  settlers  whose 
acquisition  of  land  in  fee  simple  was  made  almost  with- 
out money  and  without  price.  So,  too,  to-day  in  the 
matter  of  the  public  lands,  the  exhaustion  of  the  available 
arable  area,  the  irrigation  of  arid  soils,  the  quashing  of 
invalid  titles,  are  issues  of  telling  moment.^  But  it  is 
largely  because  our  agcr  piiblicns  has  been  of  such  tran- 
scendent political  and  economic  import  that  its  financial 
significance  has  been  trifling ;  for  when  to  the  cost  of  ac- 
quisition of  Indian  and  foreign  titles  there  is  added  the 
cost  of  government  surveys,  it  turns  out  that  the  public 
lands  have  proved  a  net  drain  upon  the  federal  treasury .^ 

'  Bastable,  Public  Finance,  p.  178. 

^  Cf.  Hart,  Practical  I'^ssays  on  American  Government, 
Essay  X;  also  published  in  the  Quarterly  Journal  of  Economics, 
Vol.  I. 

'  Prof.  Hart's  computation  (op.  cit.)  of  the  aggregate  expense 
of  publi?  lands  to  the  federal  treasury  ought  to  be  offset  by  the 


EXTANT  SOURCES  OF  QUASI-ECONOMIC  INCOME.     211 

Less  than  one  per  cent,  of  the  ordinary  revenue  of  the  na- 
tional government  is  at  present  derived  from  the  annual 
sales  of  pubhc  land,i  and  but  a  trifle  over  three  per  cent, 
of  the  commonweaUh's  receipts  flows  from  the  public 
lands  they  hold.^  There  is  almost  universal  acquies- 
cence in  the  advisability  of  alienating  the  public  domain, 
provided  always  that  it  be  turned  over  to  bona  fide  culti- 
vators and  not  to  syndicates  of  speculators.  To  pursue 
another  policy  would  imply  the  public  exploitation  of 
the  denjiain  or  an  involved  policy  of  leasing  the  public 
lands  to  individuals.  The  stimulus  of  self-interest 
would  be  lacking  in  the  first,  and  the  risks  of  specu- 
lation would  be  present  in  the  second.  Besides,  as 
Adam  Smith  urged,  if  the  public  domain,  when  sold, 
would  cancel  the  public  debt  in  whole  or  part,  a  virtual 
mortgage  on  the  public  income  could  be  lifted  and  the 
expense  of  the  public  administration  of  the  domain  could 
be  abolished.  When,  moreover,  it  is  notorious  that  in 
agriculture  the  force  of  competition  is  so  very  apt  to 
insure  fair  prices,  and  that  the  public  management  of 
lands  has  proved  scandalously  inefl^ective,  the  argument 
for  the  alienation  of  public  lands  available  for  farms 
seems  conclusive.^  There  are,  however,  certain  dissen- 
tient voices  raised  when  the  sale  of  mines  and  forests 


income  derived  from  public  lands  bestowed  upon  the  states 
and  used  by  them  as  a  source  of  income  for  educational  and 
other  purposes. 

^  The  net  federal  income  for  the  fiscal  year  1897-8  was 
$405,321,335,  of  which  $1,243,129  came  from  land  sales. 

■  Cf.  State  Library  Bulletin  of  the  State  of  New  York  (Legis- 
lation, No.  8).  Public  lands  netted  the  commonwealths  in  1890 
$5,784,770;  in  1895,  $3,796,103.  The  total  receipts  for  the  years 
in  question  are  $111,195,003  and  $124,925,920. 

'Thorold  Rogers  asserts  that  the  waste  incurred  in  the  man- 
agement of  Crown  lands  in  Great  Britain  is  "  enormous  and 
scandalous."  See  his  note  in  his  edition  of  the  Wealth  of 
Nations,  Vol.  IL,  p.  413. 


212    PUBLIC  INCOME  FROM  QU^Sl-ECONOMlC  SOURCES. 

lying  on  the  public  estate  is  proposed.  The  exhaustion 
of  the  nation's  stock  of  metal  and  timber,  which  the  ruth- 
less exploitation  of  such  property  by  private  owners 
would  bring-  about,  is  urged  against  the  transfer  of  these 
tracts  to  individual  ownership.  The  speculative  charac- 
ter of  mining,  however,  seems  to  fortify  the  otiier  reasons'- 
that  may  generally  be  uged  against  the  public  prosecu- 
tion of  industrial  ventures,  btit  a  strong  case  may  be 
made  out  for  the  public  retention  of  forest  land  and  its 
administration  by  a  competent  official  sta.fi.  Individual 
self-interest  can  be  trusted  to  supply  lumber  from  extant 
forests,  if  the  price  for  lumber  will  warrant,  but  the 
process  of  re-afiforesting  requires  such  a  length  of  time 
that  self-interest  cannot  be  trusted  to  re-create  the  ma- 
terial which  it  has  destroyed.  Moreover,  it  is  urged  that 
the  denudation  of  forest  land  causes  or  aggravates  inun- 
dations and  floods,  and  thus  indirectly  destroys  property 
and  involves  expenditure  for  levees  and  similar  protec- 
tive works.  Even  the  climate  is  said  to  be  modified — 
generally  for  the  worse — by  the  devastation  of  wood- 
lands. These  reasons  presumably  justify  the  state's  re- 
tention of  a  certain  amount  of  forest  land,  but  the  net 
money  income  from  such  land  will  probably  be  incon- 
siderable.^ 

(b)  Public  IiuJitstrics.  —  Public  industrial  enter])rises 
have  varied  in  number  and  extent  from  time  to  time, 
as  at  present  they  vary  from  nation  to  nation.  The 
maintenance  of  ordinary  roads  and  systems  of  drainage 

*  A  little  healthy  skepticism  with  reference  to  the  climatic 
influences  of  forest  devastation  may  legitimately  he  indulged 
in.  Cf.  Schoenberg,  Handhuch,  Bd.  .3,  p.  68.  Moreover,  it  may 
be  observed  passim  that  the  preservation  of  the  forest  land  in  the 
United  States  is  not  materially  advanced  by  putting  a  duty  on 
the  importation  of  foreign  timber,  and  thus  incidentally  a  pre- 
mium on  the  annihilation  of  our  own  forests. 


EXTANT  SOURCES  OF  QLJASI-ECONOMIC  INCOME.     213 

which  are  now  ahiiost  everywhere  inchuled  among  the 
proper  and  gratuitous  tasks  of  the  government  was  once 
a  business  venture  often  taken  up  by  private  individuals 
or  companies  for  private  profit.  So  to-day  we  find  a 
great  contrast  between  states  and  municipahties  in  re- 
spect of  the  inckistrial  undertakings  they  respectively  as- 
sume. At  one  extreme  stands  the  Prussian  kingdom. 
owning  and  operating  its  railroads,  telegraphs  and  tele- 
phones, and  in  great  part  managing  its  mines  and  forests. 
to  say  nothing  of  its  porcelain  factories  and  other  mis- 
cellaneous government  plants.  Our  own  federal  gov- 
ernment, on  the  other  hand,  modestly  confines  itself,  so 
far  as  business  hazards  are  concerned,  to  the  administra- 
tion of  the  post-ofifice.  Great  Britain  has  acquired  its 
telegraph  system  by  purchase  from  the  pre-existing  pri- 
vate companies,  and  manages  it  in  conjunction  with  the 
post.  The  Australian  colonies  alone  among  English- 
speaking  peoples  own  their  railroad  system  and  operate 
it  through  their  public  functionaries,  while  in  France  we 
find  under  state  direction  the  entire  manufacture  of  to- 
bacco no  less  than  the  fabrication  of  such  articles  of 
verhi  as  Sevres  ware  and  Gobelin  tapestries.  Almost  all 
governments  maintain  certain  public  works,  such  as 
dockyards  for  the  equipment  of  their  marine,  while  pub- 
lic armories  and  gun-factories  are  found  everywhere  in 
connection  with  the  preparation  of  armament  or  war 
material.  Municipalities  differ  inter  sc  no  less  than  cen- 
tral governments  in  regard  to  their  public  industries. 
The  municipality  of  Birmingham,  so  we  are  assured, 
furnishes  the  citizen  with  light,  conveyance,  literature — 
almost  everything  he  could  desire ;  while  many  of  our 
newer  municipalities  apparently  rest  satisfied  when  once 
they  have  furnished  the  citizen  with  "  freedom  to  worship 
God."     The  public  ownership  and  operation  of  water- 


214     PUBLIC  INCOMH  FROM   QUASI-ECONOMIC  SOURCES. 

works,  of  gas  and  electric  plants,  and  of  surface  roads 
is  very  frequently  found  on  the  Continent  and  in  Eng- 
land, while  our  American  cities,  with  but  few  exceptions, 
have  undertaken  none  of  these  ventures  except  that  of 
water-supply.  As  our  primary  task,  however,  is  one 
of  description,  we  may  begin  with  the  consideration  of 
the  post-office  and  of  public  waterworks,  almost  the 
only  industrial  enterprises  carried  on  in  America  by  the 
federal  and  local  governments  respectively. 

Of  all  the  caprices  of  nomenclature,  none  is  more  sm- 
gular  than  the  bequeathing  of  the  martial  term  "  post  " 
to  that  big  industrial  machine  which  more  than  any 
other  binds  the  world  of  to-day  in  the  peaceful  ties  of 
friendship  and  commerce.  It  is  nmch  as  though  by 
some  curious  accident  the  word  frontier  had  become  the 
peculiar  designation  of  peace  congresses  or  arbitration 
conventions.  But  nevertheless  the  fact  is  that  the  post 
in  its  original  form  was  an  organization  for  hastily  send- 
ing military  orders  between  the  centre  and  the  confines 
of  the  feudal  state.  It  was  only  after  swords  began  to 
give  way  to  plowshares  that  this  1)urcau  for  the  trans- 
mission of  military  intelligence  gradually  took  on  the 
functions,  first,  of  forwarding  private  persons,  and  then 
their  letters  and  packets,  from  one  part  of  the  country 
to  another.  As  industry  and  commerce  grew,  this  bus, 
ness  became  lucrative.  It  was  farmed  out  to  private 
individuals  or  to  corporations ;  in  France  to  the  Uni- 
versity of  Paris,  which  paid  annually  for  this  monopoly 
privilege  a  round  ransom  to  the  cofTers  of  the  state. 
Finally,  it  was  operated  directly  by  the  state,  and  has  in 
some  countries  taken  to  itself  the  cognate  undertakings 
of  forwarding  telegraphic  and  telephonic  messages,  of 
expressing  parcels  of  moderate  size  and  weight,  of  trans- 
mitting money,  and  of  serving  as  a  public  savings  bank 


EXTANT  SOURCES   OF  QL'ASI-ECONOMIC  INCOME.     215 

and  insurance  agency.  Everywhere  it  is  a  government 
monopoly,  and  almost  everywhere  the  government  man- 
agement is  efficient  and  generally  satisfactory.  This  last 
circumstance  alone  would  be  sufficient  to  suggest  an  in- 
quiry into  the  nature  of  the  business,  for  if  the  post- 
office  is  to  be  taken  without  dispute  as  an  exemplar  of 
state  industrial  administration,  state  socialism  will  be 
upon  us  to-morrow. 

The  post-office,  upon  investigation,  proves  to  be 
unique  in  more  ways  than  one.  The  risks  involved  in 
the  ordinary  processes  of  trade  and  manufactures  are 
wholly  absent.  The  system  of  transportation  of  which 
it  avails  itself  is  ready  to  its  hand.  "  It  has  made  use 
of  existing  and  well-known  agencies,  where  the  only 
difficulty  was  one  of  organization,"  says  Lord  Farrer, 
who  adds :  "  It  is  a  merit  of  the  undertaking,  regarded 
as  an  official  institution,  that  there  is  very  little  of  that 
speculative  element  about  it  which  is  the  life-blood  of 
commercial  activity."  ^  The  capital  which  the  state  is 
required  to  furnish  is  comparatively  small  in  amount. 
Even  in  private  concerns,  while  the  interest  on  invested 
capital  must  be  covered  if  the  business  is  to  prove  a  pay- 
ing one,  there  is  frequently  too  little  allowance  made  for 
the  depreciation  of  fixed  capital.  Where  the  state  fur- 
nishes the  capital  for  an  enterprise  the  interest  on  the 
investment  is  frequently  forgotten  when  the  industry's 
profitableness  is  gauged,  and  so  far  as  depreciation  of 
state  owned  capital  is  concerned,  there  is  little  official 
disposition  to  woi-  "  about  that.  Apres  nous  Ic  deluge  is 
the  comfortable  solace  of  the  department,  as  the  taxpayer 
finally  learns  to  his  cost.  Again,  the  post-office  is  kept 
under  the   constant   espionage   of  the  public,   who   can 

*The  State  in  its  Relation  to  Trade,  p.  107. 


2i6     PUBLIC  INCOME  FROM  QUASI-ECONOMIC  SOURCES 

check  its  efficiency  by  railway  time-tables,  and  note  and 
complain    of   the   sli^t^htest    mismanagement.     Even    the 
matter  of  postal  charges  is  comparatively  simple.     Xor 
does  the  simplicity  wholly  consist,  as  we  might  at  first 
blush    imagine,    in    the    purely    arbitrary    uniformity    of 
postal  charges  irrespective  of  the  distance  traversed  by 
the  letter  or  package.      Nothing  seems  more  transpar- 
ently artificial  than  to  make  the  same  charge  for  carry- 
ing a  letter  from  New  York  to  Brooklyn  as  for  carrying 
a  letter  from  Maine  to  California.     But  underlying  t'.is 
seemingly   incongruous   postal   tariflf   is   the   indubitable 
fact  that  this  uniform  rate  is  perhaps  as  nearly  propor- 
tional to  actual  cost  as  any  other  (within  decently  mod- 
erate limits)  which  could  be  framed.     That  great  public 
benefactor,  Sir  Rowland  Hill,  to  whom  England  and  the 
world  owe  their  systerqs  of  cheap  and  uniform  postal 
charges,  demonstrated  as  early  as  1837  that  the  expense 
of    collection,    sorting,    superintendence,    and    delivery 
(which  were  essentially  the  same  for  each  and  every  let- 
ter) far  outweighed  the  varying  expenses  incurred  in  the 
mere  transmission  of  letters  from  place  to  place. ^     A  uni- 
form postal  tarif!^,  therefore,  is  not  only  convenient  so 
far    as    it    obviates    difficulty    and    uncertainty    on    the 
part    of    the    postal    officials,    but    is    likewise    dictated 
in    part    bv    the    imdcrlving    expense    involved    in    the 
process.     This  fact  of  itself  is  sufficient  to  separate  toto 
coclo  the  question  of  postal  rates  on  the  one  hand  and 
railway  charges  on  the  other.     The  really  arbitrary  fac- 
tor in  the  matter  of  postal  rates  is  "-■  :'■  co  much  the  uni- 
form   charge    irrespective    of    distance,    as    the    division 

*  Cf.  Jevons,  Methods  of  Social  Pefori'^  n.  369.  The  con- 
ditions in  the  United  States  are  widely  different  from  those 
prevailing  in  England  in  1837.  In  the  fiscal  year  1897-8  the 
amount  paid  for  the  transportation  of  the  mails  was  $51,780,283; 
for  postmaster's  services,  $17,460,621. 


EXT/thlf  SOURCES   OF  QU/ISI-'ECONOMIC  INCOME.     217 

of  mail  matter  into  various  "  classes,"  and  the  arbitrary 
fixation  of  rates  for  those  different  classes.  We  find 
in  the  United  States  that  while  the  carriag-e  and  delivery 
of  mail  matter  of  the  first  class  alone  might  seem  profit- 
able, the  loss  involved  on  matter  of  the  second  and  lower 
classes  is  sufficient  to  produce  a  net  postal  deficit.  Still, 
public  opinion  would  not  tolerate  an  increase  in  letter 
postage,  and  to  raise  rates  considerably  on  second,  third, 
and  fourth  class  matter  would  probably  reduce  the  pres- 
ent volume  of  mail  carried.  There  seems  no  very  good 
reason,  however,  why  higher  charges  should  not  be  im- 
posed on  second  class  matter  so  as  to  avoid  the  an- 
nual postal  deficit.  It  must  be  remembered  that  the 
postal  officials  are  not  charged  with  this  business  of  clas- 
sifying mail  matter.  The  classes  are  strictly  defined  by 
law,  and  the  department  has  simply  to  obey  instructions 
which,  after  all,  are  exceedingly  simple.  Add,  finally, 
to  the  other  peculiar  characteristics  of  the  post-office 
this,  that  an  increase  in  its  volume  of  business  does  not 
ordinarily  involve  a  corresponding  increase  in  its  work- 
ing expenses,  and  that  the  great  postal  reforms  and  im- 
provements have  as  often  been  forced  upon  the  depart- 
ment from  outside  as  they  have  originated  within  its  own 
official  circle,  and  we  are  in  a  position  to  understand 
why,  as  Adam  Smith  says,  it  is  *'  the  only  mercantile 
project  which  has  been  successfully  managed  by  .  .  . 
every  sort  of  government."  ^  Where  other  enterprises 
call  for  venturesome  and  speculative  activity,  the  post- 
office  requires  orderly  routine ;  where  the  former  de- 
mand much  fixed  capital,  the  post  needs  comparatively 
little ;  where  in  ordinary  business  transactions  prices 
vary  even  for  the  same  service,  the  post-office  has  al- 

"  Wealth  of  Nations,  Book  V.,  Chap.  II.  (p.  40S  of  Vol.  IT.. 
Thorold  Rogers'  edition). 


2i8     PUBLIC  INCOME  FROM  QUASI-ECONOMIC  SOURCES. 

ways  one  price  for  the  same  service ;  where  other  indus- 
trial enterprises,  if  mismanaged,  long  escape  exposure 
and  protest,  the  Argus-eyed  public  is  daily  inspecting 
the  efficiency  of  the  postal  service;  where  the  freight 
agent  is  puzzling  over  a  complicated  railway  tariflf,  the 
postal  clerk  has  the  same  simple  regulations  to  guide 
him  to-day  and  to-morrow.  Under  such  circumstances 
the  government's  successful  administration  of  the  post- 
office  can  hardly  be  construed  as  proving  that  the  gov- 
ernment can  profitably  acquire  and  capably  administer 
other  industrial  enterprises.  The  admittedly  successful 
management  of  the  post-office  must  not  be  understood 
to  imply  that  it  is  uniformly  self-supporting.  "  England, 
France,  and  Germany  are  the  only  countries  that  derive 
a  substantial  amount  [of  money  revenuej  from  the  postal 
service."  ^  The  post-office  in  the  United  States,  with 
the  exception  of  two  years,  has  not  "  paid  its  way  "  since 
1865,  and  the  ordinary  deficit  which  now  has  to  be  met 
by  appropriation  is  almost  $10,000,000  a  year.2  Thus 
in  the  department  for  the  fiscal  years 

180S-6  the  revenue  was  $82,499,208;    expenditure  $90,626,296 
1896-7     "  "  "      $82,665,462;  "  $94,077,242 

1897-8    "  "  "     $89,012,618;  "  $98,033,523 

Obviously,  where  the  state  monopolizes  an  industry, 
it  may  set  such  prices  as  net  the  maximum  revenue,  or 
such  prices  as  yield  a  fair  profit,  or  such  as  will  simply 
cover  cost.  It  may  also  render  products  or  services 
gratuitously  and  charge  the  expense  upon  the  proceeds 

*  Bastable,  Public  Finance,  p.  194. 

'  In  1882-3  and  1883-4  the  post  office  yielded  a  minimum  net 
income  (no  allowances  being  made  for  depreciation  of  postal 
property).  The  subsequent  reduction  of  letter  postage  from  3 
to  2  cents  led  to  steady  deficits  thereafter. 


EXT/iNT  SOURCES  OF  QUASI-ECOhlOMIC  INCOME.     219 

of  taxation.  In  a  democratic  state,  however,  two  ten- 
dencies are  almost  always  at  work  when  the  govern- 
ment enters  the  industrial  field.  One  is  a  popular  clamor 
for  low  prices,  and  the  other  is  popular  indifference 
to  financial  deficits  which  these  low  prices  when  ac- 
corded tend  to  produce.  Both  tendencies  showed  them 
selves  in  England  in  the  matter  of  government  tele- 
graphs ;  both  are  in  operation  in  the  United  States  in 
regard  to  postal  charges.  There  is  almost  every  reason 
to  believe  that  a  uniform  letter  charge  of  one  cent  an 
ounce  would  largely  increase  the  annual  postal  deficit, 
and  there  is  very  little  reason  to  think  that  a  deficit  so 
produced  would  occasion  any  solicitude  on  the  part  of 
the  public.  It  is  all  well  enough  theoretically  to  discuss 
which  policy  the  state  ought  to  pursue  in  fixing  its 
charges, — whether  monopoly  profits  or  fair  profits,  or 
cost,  or  gratuitous  service  should  be  the  rule, — but  the 
fact  is,  as  stated  above,  that  democratic  sentiment  will 
incline  toward  the  cost  or  gratuity  principle.  Conse- 
quently, if  it  is  a  good  rule  that  (except  where  services 
are  of  universal  utility,  such  as  police  protection  or  jus- 
tice) the  one  who  enjoys  the  music,  and  not  the  tax- 
payers generally,  should  pay  the  fiddler,  there  is,  in  view 
of  this  tendency  of  democratic  finance,  additional  reason 
for  limiting  the  state's  industrial  functions  to  their  nar- 
rowest practicable  limit. 

The  business  of  carrying  and  delivering  the  mails  was, 
as  we  have  seen,  an  enterprise  designed  originally  for 
military  and  administrative  purposes.  When  changed 
industrial  conditions  had  rendered  it  chiefly  an  instru- 
ment of  commerce,  the  state  administration  continued. 
The  peculiar  character  of  the  undertaking,  moreover, 
proved  specially  adapted  to  such  public  management, 
and  thus  the  state's  monopoly  of  the  post  is,  in  a  sense, 


2  20     PUBLIC  INCOME  FROM   QUASI-ECONOMIC  SOURCES. 

an  historical  accident.  Very  different  is  the  story  of  the 
government's  acquisition  and  monopoly  of  industries  of 
more  recent  origin.  Especially  in  the  case  of  local  gov- 
ernments has  such  action  been  due  to  the  rapid  growth 
of  concerns  which  from  their  nature  are  aliens  to  the 
commonwealth  of  competition.  Prominent  among  such 
industries  are  the  so-called  "  natural  monopolies  "  en- 
gaged in  supplying  water,  light,  and  local  transporta- 
tion. Characteristic  of  these  typical  monopolies  are  the 
economy  which  results  from  their  unified  organization 
and  operation ;  their  large  exclusion  of  competition  by 
reason  of  the  general  inconvenience  which  must  result 
from  tearing  up  streets  or  cumbering  their  surface  with 
parallel  competing  lines  of  pipe,  track,  or  wire ;  and, 
lastly,  the  indispensable  nature  of  the  services  which 
these  monopolies  render  to  the  increasing  part  of  our 
population  which  dwells  in  cities.  The  "  municipaliza- 
tion "  of  these  natural  monopolies  has  gone  farther  in  the 
Old  World  than  in  the  United  States,  but  we  have  made 
a  beginning  of  erecting  and  operating  public  water- 
works in  most  of  our  larger  cities.  Unquestionably, 
too,  we  have  begun  at  the  right  end.  The  article  sup- 
plied is  one  of  prime  and  permanent  necessity.  The 
technical  apparatus  has  been  -brought  to  a  high  degree 
of  perfection,  and  the  engineering  work  required  for  the 
construction  of  reservoirs  and  the  placement  of  mains 
embodies  no  particular  mystery.  The  capital  expendi- 
ture, while  enormous  in  the  aggregate,^  is  not  prohibi- 
tory or  excessive  for  each  city  or  town.  The  manage- 
ment of  the  business  involves  no  risk  and  little  peculiar 
difficulty.      Responsibility    for    inefficiency     is     quickly 


*  The    census    of    1890    estimates    local    debts   contracted    for 
waterworks  at  about  $ig2,ooo,ooa 


EXTANT  SOURCES  OF  QUASI-ECONOMIC  INCOME.    221 

brought  home  in  the  small  areas  of  local  government; 
and  the  rates  charged  consumers,  while  they  vary  from 
place  to  place,  ought  generally  to  cover  the  expense  of 
operation,  the  interest  on  the  capital  invested,  with  an 
additional  margin  for  the  maintenance  of  the  plant  and 
the  ultimate  extinction  of  the  bonded  indebtedness  in- 
curred to  establish  the  works.  Still,  if  the  water  rate  is 
reduced  below  cost,  the  very  general  utility  of  the  com- 
modity supplied  may  serve  to  cloak  or  palliate  the  de- 
parture from  the  sound  rule  of  finance  above  enunciated. 
No  municipality  can  be  expected  to  be  devoid  of  all 
idiosyncrasies,  and  that  city  is  fortunate  which  errs  from 
the  strict  path  of  financial  duty  only  in  the  matter  of 
refusing  to  put  "  a  tax  on  cleanliness." 

In  addition  to  the  two  typical  industries,  the  post- 
office  and  public  waterworks,  managed  respectively  by 
the  federal  and  local  governments,  passing  mention  must 
here  be  made  of  several  additional  business  ventures  un- 
der public  management  in  the  United  States.  Several 
cities  1  have  instituted  or  acquired  plants  for  furnishing 
illuminating  gas,  and  many  more  have  public  electric 
light  plants.  There  are  a  few  tentative  instances  of 
municipal  street  railroads,  while  markets,  bridges, 
wharves,  docks,  and  harbors  have  for  a  longer  time  been 
under  municipal  management.  The  advisability  of  such 
undertakings  will  come  up  later  for  discussion.  Both 
the  federal  and  local  governments  are  the  recipients  of 
penal  fines  and  of  registry  fees  and  other  miscellaneous 
fees.  The  federal  government,  moreover,  has  an  addi- 
tional source  of  profit  in  the  seigniorage  charge  made 
upon  subsidiary  coin.     The  bonds  issued  in   1862  and 

^  Philadelphia  was  for  a  long  time  the  standing  example  of 
a  laree  city  ownins-  and  operating  its  own  gas  plant.  The  prop- 
erty has  recently  been  leased  to  a  private  company,  however. 


2  22     PUBLIC  INCOME  FROM  QUASI-ECONOMIC  SOURCES. 

1864  to  aid  in  the  buiklin"-  of  the  Pacific  railroads  ^  rep- 
resent the  only  extensive  speculation  in  capital  to  which 
the  federal  government  (and  then  largely  for  non-com- 
mercial reasons)  has  of  late  years  committed  itself.  It 
is  probable  that  the  loans  made  to  construct  these  roads 
will  furnish  little  or  no  encouragement  for  another  fed- 
eral subsidy  to  similar  commercial  enterprises.  Lastly, 
it  must  never  be  forgotten  that  in  connection  with  its 
other  work  the  federal  treasury  acts  as  a  bank  of  issue. 
Whether  any  profits  in  the  long  run  accrue  from  this 
source  is  a  disputed  question.  The  maintenance  of  a 
credit  circulation  largely  in  excess  of  its  metallic  reserve 
is  held  to  imply  that  interest  is  saved  on  the  uncovered 
circulation,  and  it  is  plausibly  argued  that  interest  saved 
is  interest  earned.  At  all  events,  whatever  income,  if 
any,  is  derived  from  the  Treasury's  banking  business 
does  not  take  the  form  of  money  income,  and  can  only 
be  estimated  by  considering  how  far,  if  at  all,  govern- 
ment banking  makes  the  annual  expenditure  for  interest 
on  the  public  debt  less  than  such  interest  would  other- 
wise be.  This  question  is  reserved  for  examination  in 
Part  III. 

To  recapitulate,  the  contractual  public  income  in  the 
United  States  accrues  mainly  from  the  post-ofifice  and 
municipal  waterworks.  Both  of  these  undertakings,  it  is 
almost  universally  conceded,  are  fit  and  proper  subjects 
of  government  monopoly  and  management.     Analogous 


'  The  total  amount  of  bonds  issued  to  the  Pacific  roads  was 
$64,623,512.  The  interest  paid  on  these  bonds  had  increased 
the  railroads'  indebtedness  to  the  government  by  $71,097,610 
on  November  i,  1893.  This  debt  has  been  partly  repaid,  and 
arrangements  have  been  concluded  for  the  repayment  of  the 
residue  outstanding,  both  principal  and  interest,  within  ten  years 
(from  1899),  excepting  only  the  interest  on  about  $6,000,000  ad- 
vanced to  the  Kansas  Pacific  Railroad. 


EXTANT  SOURCES  OF  QUASI-ECONOMIC  INCOME.     223 

enterprises  are  in  other  countries  under  state  control.  How 
far  the  extension  of  such  governmental  industry  is  advis- 
able in  this  country  remains  to  be  considered.  But  even 
though  the  limits  of  public  industry  eventually  be  wid- 
ened, there  is  little  reason  for  believing  that  the  net  in- 
come which  they  will  furnish  the  public  chest  will 
approximate  the  much  greater  revenue  collected  through 
the  agency  of  taxation. 


CHAPTER    X. 

EXTENSION    OF   THE   STATE'S    CONTRACTUAL   IN- 
COME. 

General  Features  of  Railway  Development. — So  long 
as  we  confine  our  discussion  to  the  depiction  of  the  suc- 
cessful administration  of  the  post  and  of  waterworks  by 
governmental  agency,  our  task  is  irenical.  When  we 
trench  upon  the  question  of  extending  the  industrial 
sphere  of  the  government,  controversy  at  once  grows 
rife.  To  transport  ourselves  into  the  midst  of  the 
fray  it  is  only  necessary  to  begin  with  "  the  railroad 
problem."  This  well-worn  phrase  serves  as  a  label 
for  many  issues.  For  there  are  a  thousand  railroad 
problems,  or  rather  a  thousand  different  aspects  of  the 
same  problem,  which  daily  confront  us.  Ask  the  in- 
vestor to  define  the  problem,  and  he  will  tell  you  it  is  the 
maintenance  of  dividends  and  interest  payments  on  rail- 
road securities.  Ask  the  traffic  manager,  and  you  will 
learn  that  the  railroad  problem  which  confronts  him  is 
to  increase  the  volume  of  his  road's  traffic.  The  shipper 
is  equally  sure  that  low  freight  rates  are  "  the  one  thing 
needful  "  for  all  alike,  and  a  special  rate  or  rebate  most 
necessary  for  himself  in  particular.  The  socialist,  on  the 
other  hand,  regards  all  these  answers  as  distressingly 
inadequate,  and  thinks  to  see  the  solution  of  the  real 
problem  in  the  elimination  of  the  element  of  private 
profit,  and  in  the  diffusion  of  economic  advantage  which 

324 


GENERAL   FEATURES   OF  RAIL IV AY  DEVELOPMENT.   225 

he  thinks  must  result  from  state  ownership  and  opera- 
tion of  our  railway  systems.  It  is  this  last  contention 
which  will  immediately  concern  us,  for  should  it  be  sub- 
stantiated, the  financier  must  make  up  his  mind  to  the 
public  acquisition  of  railroads,  and  to  an  incredibly  vast 
enlargement  of  the  state's  industrial  domain,  of  its  an- 
nual expenditures  and  its  annual  income  from  quasi- 
economic  sources.  Evidently  the  discussion  of  so 
momentous  an  innovation  will  require  a  preliminary 
glance  at  the  salient  features  of  railway  development. 

It  is  hard  for  us  to  realize  vividly  the  condition  of 
economic  society  before  the  era  of  steam  transportation. 
We  look  to-day  at  the  map  with  eyes  grown  accustomed 
to  the  criss-cross  and  zigzag  of  railroad  lines.  Our  no- 
tion of  the  distance  from  New  York  to  Boston,  for  ex- 
ample, is  an  estimate  of  the  time  consumed  and  the 
discomfiture  entailed  by  so  many  hours  on  a  moving 
platform,  and  it  requires  a  rather  violent  jogging  of  the 
imagination  to  conjure  up  a  picture  of  that  utter  isola- 
tion which  was  relieved  only  at  intervals  by  the  stage- 
coach and  the  mounted  messenger.  It  is  not  surprising, 
therefore,  that  the  generation  which  witnessed  the  incep- 
tion of  steam  railroads  should  have  failed  miserably  to 
form  any  true  conception  of  the  nature  and  importance 
of  this  new  and  revolutionary  agency.  They  made  no 
pretensions  to  being  prophets,  and  even  if  they  had,  it 
was  questionable  whether  their  boldest  flights  would 
have  been  such  as  to  outwing  the  railway  achievements 
which  we  regard  to-day  as  commonplace  matter-of-fact. 
The  view  first  taken  of  railroads  was,  very  naturally,  that 
which  was  most  easily  deduced  from  the  supposed  anal- 
ogy of  railroads  to  public  highways.  The  received  dicta 
of  the  economists  upon  trade  and  industry  in  general 
were  supposed  to  apply  rigorously  to  railways.     How 


226  EXTENSION  OF  THE  ST/iTE'S  CONTRACTUAL  INCOME. 

slowly  the  real  nature  of  railway  transportation  was  ap- 
prehended may  be  jud.c^ed  from  some  of  the  popular 
ideas  current  between  1830  and  1840.  It  was  in  the  year 
first  mentioned  that  the  first  English  railway,  that  from 
Liverpool  to  Manchester,  was  completed.  In  1836  there 
was  published  by  Henry  Fairbairn  a  treatise  entitled 
"  The  Political  Economy  of  Railroads,"  which  was  not 
merely  representative  of  the  advanced  thought  of  his 
age  on  the  subject,  but  which  was  fully  abreast  of  expert 
opinion  as  w^ell.  Fairbairn,  who  was  a  man  of  no  mean 
penetration,  argued  in  the  manner  of  Adam  Smith  that 
roads  operated  by  private  individuals  were  likely  to  be 
superior  to  those  managed  by  joint-stock  companies; 
that  free  competition  in  railroading  was  the  certain  guar- 
antee of  conforming  rates  to  the  cost  of  service ;  he  as- 
serted that  "  the  cost  of  transportation  by  steam  is  so 
very  expensive  that  little  merchandise  is  carried  upon 
the  railroad,"  and  that  "  horse-power,  in  the  present  state 
of  our  knowledge  of  the  principles  of  motion,  is,  there- 
fore, much  cheaper  than  any  of  which  we  are  possessed." 
Canals  he  scouted  as  among  the  "  rude  inventions  of  a 
former  age."  It  was  popularly  supposed  at  first  that  rail- 
way carriages  and  locomotive  engines  would  be  owned 
by  individuals,  and  would  be  used  upon. the  iron  high- 
ways as  the  personal  convenience  of  the  owners  might 
dictate.  It  is  enough  to  humble  the  presumptuous  fore- 
cast of  the  economist  to  mark  how  a  man  of  Fairbairn's 
perspicuity  was  led  to  set  up  a  series  of  propositions 
about  railroad  economics  every  one  of  which  experience 
has  flatly  reversed.  The  railway  corporation  has  en- 
tirely displaced  the  private  railway  company;  rates  are 
based  on  almost  everything  but  cost  of  service;  and, 
most  important  of  all,  freight  traffic  has  attained  such  a 
magnitude  that  it  entirely  dwarfs  the  transportation  of 


GENERAL  FEATURES  OF  RAILIVAY  DEyELOPMENT.   227 

passengers,  and  furnishes  roads  with  nearly  four  fifths 
of  their  earnings. 

Railroad  building,  however,  progressed  in  utter  un- 
concern of  the  a  priori  speculations  of  the  economists. 
The  wonderful  growth  in  railway  mileage  in  Europe  and 
America  is  too  well  known  to  require  more  than  passing 
mention  here,  and  time  itself  would  fail  to  tell  of  the 
innumerable  improvements  in  engineering,  appliances, 
speed,  safety,  and  comfort  which  are  all  combined  in 
the  world's  railroad  systems  of  the  present.^ 

This  astounding  development  of  a  new  system  of  high- 
ways equipped  with  every  appliance  for  the  speedy  trans- 
portation of  passengers  and  freight  would  have  proved 
universally  acceptable  had  not  the  economic  organiza- 
tion of  railroads  and  their  rate  sheets  given  grave  cause 
for  concern.  A  network  of  superior  toll  pikes,  each 
for  a  few  miles  under  the  control  of  a  toll  pike  company, 
which  was  bound  to  meet  the  competition  of  hundreds 
of  similar  companies,  and  thus  under  compulsion  to  ex- 
act only  reasonable  charges,  presented  no  very  alarming 
prospect  in  the  early  days  of  railroad  building.  It  took 
years,  in  some  cases  even  decades,  for  the  citizen  to  real- 


*  To  get  an  idea  of  the  growth  of  railroads,  it  may  be  well 
to  remember  that  it  was  in  1829  that  the  first  line  was  con- 
structed in  the  United  States.  Poor's  Manual  for  1897  gives 
the  following  figures  for  the  railroads  in  the  United  States  for 
1896: 

Miles  of  railroad  operated 180,891 

Tons  of  freight  moved 773,868,716 

Freight  mileage 93,885,853,634 

Passengers    carried 535,120,756 

Passenger  mileage 13,044,840,243 

Earnings   from   freight $770,424,013 

Earnings  from  passengers $265,313,258 

Miscellaneous   earnings $89,894,754 

Total   gross   earnings $1,125,632,025 

Net    earnings %3i2^m,7S^ 

Earnings  per  ton-mile 0.821  cents 


228  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

ize  the  fact  that  in  abetting^  the  Hberal  construction  of 
railways  he  had  created  an  industry  whicli  was  Ukely  to 
prove  not  his  servant  but  liis  master.  Even  those  pub- 
licists who  had  stood  sponsors  to  the  infant  industry  were 
appalled  to  see  it  speedily  develop  traits  of  monopoly, 
extortion,  and  unabashed  favoritism. 

In  the  first  place  the  tendency  to  consolidation  became 
unmistakable.  The  first  railroads  were  in  length  very 
similar  to  our  trolley  roads  to-day.  The  average  length 
of  early  English  lines  was  about  fifteen  miles.  \'ery 
naturally  short  lines  having  one  terminus  in  common 
became  united  under  a  single  management.  Expenses 
were  reduced  thereby,  and  transportation  facilities,  es- 
pecially for  through  shipments,  were  enhanced.  "  If  we 
follow  back  the  history  of  almost  any  railway  in  the 
United  States,  we  find  the  same  tendency  illustrated. 
The  line  of  the  New  York  Central  between  the  Hudson 
and  Lake  Erie  alone  represents  the  union  of  what  was 
originally  sixteen  difi^erent  companies."  ^  In  England 
in  1847,  with  over  five  thousand  miles  of  rail,  there  were 
several  hundred  companies.  Twenty-five  years  later, 
with  a  mileage  of  thirteen  thousand,  the  entire  control 
was  virtually  in  the  hands  of  a  dozen  companies.^  The 
same  tendency  showed  itself  in  France  and  on  the  Con- 
tinent generally,  while  the  movement  has  gone  so  far  in 
the  l^'nited  States  that  the  Statistician  of  the  Interstate 
Commerce  Commission  declares  that  at  present  "over 
83  per  cent,  of  the  business  and  82  per  cent,  of  the  earn- 
ings [of  railroads]  fall  under  the  control  of  less  tlian 
forty  associations  of  business  men."  Thus  out  of  hun- 
dreds of  short,  disconnected  links  there  have  been  forged 
by  consolidation  those  gigantic  chains  of  rail  which  to- 

*Hadley,  Railroad  Transportation,  p.   12. 


GENERAL   FEATURES   OF  R/tlLU^AY  DEVELOPMENT.  229 

day  span  the  continent.  The  day  of  the  independent 
road  was  brief.  The  era  of  the  railway  "  system  "  suc- 
ceeded. The  importance  of  through  traffic  was  partly 
cause  and  partly  effect  of  the  tendency  that  made  for 
consolidation.  The  short  cross-roads  became  feeders  of 
the  systems  they  adjoined,  and  in  hundreds  of  cases  by 
sale  or  lease  were  swallowed  up  in  the  greater  organiza- 
tions. The  utter  impossibility  of  competing  with  the 
railroad  in  the  transportation  of  freight  or  passengers 
gave  the  companies  a  practical  monopoly  in  cases  where 
the  shipper  had  no  access  to  another  line  of  railroad  or 
to  carriage  by  water.  Instead  of  a  new  system  of  short, 
multitudinous  pikes  employing  improved  instruments  of 
locomotion,  and  compelled  by  self-interest  to  ask  only 
reasonable  (i.e.  competitive)  tolls,  the  business  commu- 
nity awoke  to  find  itself  parcelled  out  amongst  a  small 
number  of  monopolist  carriers  whose  rates  at  many 
points  were  not  in  the  slightest  degree  determined  by 
competition. 

It  was  this  last  consideration  which  came  home  most 
vividly  to  the  public  and  the  shipper.  Some  vague  dis- 
quietude was  felt  unquestionably  at  the  tendency  towards 
consolidation.  There  were  not  wanting  Cassandras  to 
plague  the  quiet  hour  with  their  uncomfortable  alter- 
native :  "  The  state  must  rule  the  railroads  or  the  rail- 
roads will  rule  the  state."  Very  likely,  thought  the  ship- 
per whose  mind  would  revert  to  the  very  much  more 
pertinent  inquiry  why  he  must  pay  more  for  freight  than 
his  competitor  in  X,  or  how  he  could  get  a  rebate  like 
his  neighbor  in  Y.  This  absorption  of  little  roads  by 
big  ones  was  all  very  dreadful,  the  farmer  admitted,  but 
these  freight  rates  were  a  thousand  times  more  intolera- 
ble. Not  merely  nor  indeed  mainly  that  they  were  too 
high,  absolutely  considered,  but  that  they  were  so  im- 


230  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

possibly  unfair  as  between  himself  and  his  competitors 
in  the  towns  near  by. 

The  '  manifest  destiny  '  of  short  railroad  lines  to  amal- 
gamate was  no  more  indisputable  than  the  tendency 
everywhere  evident  to  fix  rates  for  transportation  upon 
principles  which  at  first  sight  appeared  most  extraordi- 
nary. It  had  been  assumed  that  carriers  by  rail  would 
adjust  their  charges  upon  the  basis  of  tolls,  that  is,  upon 
the  actual  cost  of  service.  This,  it  was  supposed,  would 
correspond  roughly  to  the  distance  traversed.  The  rail- 
road companies  soon  found  that  it  w^as  impossible  in  the 
first  place  to  estimate  the  cost  of  specific  shipments  by 
rail,  and  in  the  second  place  that  a  tariff  based  upon  a 
system  of  tolls  was  impossible  of  enforcement.  The  im- 
mense amount  of  capital  invested  in  railroads  requires 
that  a  great  part  of  every  road's  earnings  be  applied  to 
meeting  the  interest  charges  on  the  capital  sunk.  These 
fixed  charges  are  practically  the  same  whether  the  total 
traffic  is  great  or  small.  The  expense  incurred  in  the  actual 
movements  of  cars  varies  only  within  certain  moderate 
limits.  To  move  double  the  ordinary  volume  of  freight 
does  not  begin  to  double  the  expenses  of  the  carrier. 
To  move  a  full  train  load  costs  little  more  than  to  move 
the  same  cars  half  full.  Hence  it  is  impossible  to  esti- 
mate even  approximately  the  cost  of  any  specific  ship- 
ment.^  What  the  carrier  has  to  secure,  if  possible,  is  an 
aggregate  revenue  suf^cient  to  meet  fixed  charges,  pay 
operating  expenses,  and  maintain  unimpaired  the  con- 
dition of  the  railroad  property.  Even  these  require- 
ments, it  would  seem,  might  be  met  by  a  system  of  tolls 
producing  revenue  enough  in  the  aggregate  to  defray 
total  expenses  and  to  leave  a  margin  for  profit.      But 

'  Cf.  Ackworth's  article  on  Railroad  Rates,  Economic  Jour- 
nal, Sept.  1897. 


GENERAL  FEATURES  OF  RAILIVAY  DEVELOPMEhlT.  231 

such  an  attempt  to  apportion  total  expenses  among  ship- 
pers charged  severally  in  proportion  to  the  distance 
traversed  by  their  respective  consignments  is  absolutely 
foiled  by  the  unavoidable  necessity  imposed  upon  the 
carrier  of  meeting  at  certain  points  the  competition  of 
rivals  by  land  or  sea.  The  terminus  of  a  railroad  sys- 
tem is  not  infrequently  a  competitive  point  served  by 
several  railroads  and  often  by  steamship  lines.  To  o  - 
tain  traffic  at  such  a  point  it  is  necessary  to  meet  the 
competition  which  centres  there.  So  long  as  the  rates 
demanded  at  these  points  by  shippers  are  barely  enough 
to  cover  the  additional  movement  charges  the  carrier  is 
prompted  to  concede  such  rates.  This  means  low  rates 
for  through  traffic  and  low  rates  for  other  points  on  the 
same  line  where  an  intersecting  road  creates  a  competi- 
tive nucleus.  At  such  points  each  carrier  has  to  grant 
low  rates  or  get  no  freight  at  all.  But  no  such  necessity 
exists  at  other  points  on  his  line  where  competition  does 
not  exist.  Neither  the  imperious  necessity  of  meeting 
competition  nor  still  less  the  a  priori  idea  of  proportion- 
ing rates  to  distance  traversed  weighs  in  favor  of  accord- 
ing low  rates  to  local,  non-competitive  traffic.  The  car- 
rier argues  with  great  plausibility  that,  hard  as  the 
discrimination  seems  against  the  local  shipper,  it  is  really 
the  best  result  attainable  under  the  circumstances.  To 
lower  all  rates  horizontally  to  the  through  traffic  level 
would  result  in  the  bankruptcy  of  the  roads  and  in  the 
curtailment  or  abolition  of  transportation  facilities  for 
through  traffic  and  local  traffic  alike.  To  raise  the  rates 
on  through  traffic  to  the  level  of  local  rates  would  be  to 
sacrifice  the  through  traffic  altogether,  and  would  neces- 
sitate the  raising  of  local  rates  still  higher.  The  local 
shipper  was  practically  told  that  he  was  the  unfortunate 
victim  of  circumstances,  and  that  the  exorbitant  rates  of 


232   EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

which  he  complained  were  "  the  inevitable  result  of  uni- 
versal laws,  with  which,  if  it  were  not  impious,  it  were 
as  hopeless  to  quarrel  as  with  the  law  of  gravitation." 
God  and  Nature,  not  the  railway  company,  had  discrimi- 
nated against  him.  It  is  not  our  purpose  at  this  point 
to  sift  the  chafT  from  the  wheat  in  these  contentions. 
Suffice  it  to  say  that  rates  as  they  were  at  first  made 
were  not  only  not  proportional  to  the  distance  traversed, 
but  on  local  traffic  were  not  infrequently  higher,  in 
certain  instances  six  times  higher,^  than  rates  upon 
through  traffic  hauled  a  much  longer  distance  over  the 
same  line.  This  necessity  of  making  special  rates  for 
various  points  upon  the  carrier's  line  made  his  rate  sheet, 
as  may  be  easily  conceived,  a  curious  labyrinth.  But 
these  varying  rates  caused  only  the  smallest  part  of  his 
perplexities.  Traffic  managers  soon  discovered  that  the 
charges  they  could  impose  depended  very  largely  on  the 
z'ahie  of  the  various  articles  they  transported.  A  rate 
which  the  shipper  would  pay  per  car-load  on  manufac- 
tured woollen  goods  was  absolutely  prohibitory  if 
charged  on  bulky  articles  like  coal  or  lumber.  Either 
coal  must  be  hauled  at  rates  far  below  those  imposed  on 
textiles  or  not  hauled  at  all.  If  a  special  rate  on  coal, 
therefore,  would  suffice  to  cover  the  small  additional  ex- 
pense of  hauling  additional  cars,  such  rates  were  ac- 
corded. Freight  therefore  was  classified  on  the  com- 
plex basis  of  value,  perishability,  and  similar  considera- 
tions, and  each  class  of  freight  had  its  own  rate,  to  say 
nothing  of  special  rates,  such  as  grain  or  cattle  rates, 
which  were  established  on  particular  articles.  The  rate 
sheets  had  become  a  veritable  "  wilderness  of  single  in- 
stances."    In  this  hopeless  position  the  traffic  manager 

'  Lewis,    National    Consolidation    of    the    Railways    in    the 
United  States,  p.  97. 


GENERAL  FEATURES   OF  RAILIVAY  DEVELOPMENT.   233 

was  guided  in  the  majority  of  cases  by  the  rule  of  charg- 
ing what  the  traffic  would  bear.^  Even  at  non-com- 
petitive points,  if  a  special  rate  would  increase  the 
volume  of  traffic  and  leave  the  least  margin  over  operat- 
ing expenses,  the  rate  was  generally  accorded.  These 
considerations  will  explain  in  a  way  the  origin,  the  sin- 
gular complexity,  and  the  apparent  anomalies  of  railroad 
rates.  It  is  comical  therefore  to  see  the  dismay  of  legis- 
lative commissions  when  they  proceed  to  investigate  the 
subject  of  railway  charges.  The  witnesses,  generally 
practical  railroad  agents,  have  inherited  a  volume  of 
rates  of  whose  origin  they  are  hopelessly  ignorant.  They 
have  made  in  the  rate  sheets  a  thousand  empirical 
changes  to  meet  concrete  circumstances,  and  when 
summoned  to  explain  the  rationale  of  rate  sheet  con- 
struction, they  develop  such  abnormal  powers  of  obfusca- 
tion  that  the  investigating  Solons  not  infrequently  leave 
the  subject  of  their  quest  with  a  mystified  resignation 
such  as  befits  those  who  have  confronted  the  unsearch- 
able ways  of  an  inscrutable  Providence. 

However  disappointing  may  be  the  investigation  of 
the  origin  of  any  particular  rate  sheet,  the  forces  which 
have  controlled  the  formation  of  such  sheets  in  general 
are  the  necessity  of  meeting  competition  at  certain 
points,  of  grading  freight  largely  on  the  basis  of  value, 
and  of  earning  by  all  these  means  sufficient  in  the  long 
run  to  meet  fixed  charges,  pay  operating  expenses,  and 
leave  a  possible  margin  for  dividends.^    Rates,  it  is  true, 

\The  two  paramount  considerations  in  fixing  rates  are: 
(i)  the  necessity  of  meeting  competition;  (2)  the  necessity  of 
developing  traffic.  The  first  explains  largely  the  low  rates  on 
through  traffic;  the  second  the  tarification  of  goods,  i.e.  im- 
posing on  them  what  rates  they  can  be  made  to  pay  without 
cutting  down  the  volume  of  freight. 

'  "  The  rates  are  governed  by  the  nature  and  extent  of  the 
traffic,  the  pressure  of  competition,  either  by  water,  by  a  rival 


234  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

have  often  been  made  on  grounds  of  purely  arbitrary 
favoritism,  either  local  or  personal,  but  it  can  hardly  be 
questioned  that  this  has  been  a  secondary  rather  than  a 
primary  factor  in  their  creation.  The  extent  to  which 
these  rate  determining  agencies  have  been  effective  has 
depended  largely  upon  the  varying  conditions  under 
which  railway  systems  have  developed  in  various  coun- 
tries. The  forces  above  specified  have  had  freest  play 
in  England  and  the  United  States,  where  we  have  relied 
on  private  and  corporate  initiative  to  build  and  develop 
our  railway  systems  under  the  stress  of  competitive 
rivalry.  The  plan  upon  which  the  French  railways  were 
constructed,  with  several  large  independent  systems  all 
radiating  from  Paris,  has  served  to  release  the  French 
companies  in  large  measure  from  the  restraints  of  their 
mutual  competition.  The  state  railway  system  of  Aus- 
tralia and  Prussia  has  operated  in  a  measure  to  uphold 
the  system  of  tolls  in  those  countries.  But  even  here  it 
has  been  necessary  to  make  exceptions  in  the  toll  system 
where  the  competition  of  water-routes  or  foreign  rail- 
roads was  encountered.  Moreover  the  universal  adop- 
tion of  schedules  of  classification  for  freight  has  proved 
that  the  principle  of  tolls,  i.e.  of  basing  rates  exclusively 
on  cost,  is  by  itself  impossible  of  application,  whether 
upon  state  roads  or  private  lines. 

Government  Regulation  of  Railroads  in  the  United 
States. — In  the  very  beginning  of  the  railroad  era  there 
was  a  strong  a  priori  presumption  in  favor  of  govern- 
mental control  or  ownership.     A  railroad  after  all  was 

railway  route,  or  by  other  land  carriage;  but  above  all,  the  com- 
panies have  regard  to  the  commercial  value  of  the  commodity, 
and  the  rate  it  will  bear,  so  as  to  admit  of  its  being  produced 
and  sold  in  a  competing  market  with  a  fair  margm  of  profit."— 
The  Working  and  Management  o/  an  English  Railway,  p.  264, 
by  George  Findlay. 


FEDERAL  RAILIVAY  REGULATION.  235 

only  a  new  variety  of  public  highway,  fitted  no  doubt 
mainly,  perhaps  exclusively,  for  wagons  of  a  certain 
gauge,  offering  exceptional  advantages  to  the  use  of 
steam  as  a  motive  power,  but  still  a  highway.  It  did  not 
at  that  early  day  smack  of  socialism  to  hold  a  brief 
for  state  railroads.  Even  Adam  Smith  found  it  entirely 
consistent  with  "  the  system  of  natural  liberty  "  that  the 
sovereign  should  erect  and  maintain  "  certain  public 
works  which  it  can  never  be  for  the  interest  of  any  indi- 
vidual, or  small  number  of  individuals,  to  erect  and  main- 
tain " ;  and  though  Smith's  rule  was  formulated  in  the 
ante-railway  age,  still  his  language  might  by  implication 
be  construed  as  implying  his  approval  of  a  state  railroad 
system,  for  he  remarks  that  the  "  expense  of  maintaining 
good  roads  and  communication  is,  no  doubt,  beneficial 
to  the  whole  society,  and  may  therefore,  without  any  in- 
justice, be  defrayed  by  the  general  contribution  of  the 
whole  society."  ^  In  the  United  States  prior  to  1830  the 
construction  and  maintenance  of  highways  was  very  gen- 
erally a  task  assumed  by  the  state  and  local  governments. 
Some  private  toll  pikes  there  were,  but  they  were  re- 
garded as  exceptional  and  as  a  temporary  expedient. 
Not  only  the  commonwealths  and  their  local  subdivi- 
sions, but  even  the  federal  government  had  made  ex- 
penditures upon  the  construction  of  public  highways. 
This  policy  of  internal  improvements  came  first  to  an 
end  so  far  as  the  federal  government  was  concerned 
when  Jackson  vetoed  the  Maysville-Road  Bill.^  There- 
after the  task  which  had  been  laid  aside  by  the  federal 
government  was  taken  up  and  pushed  with  zest  by  the 

'Wealth  of  Nations,  Bk.  V.,  Chap.  I.  (p.  403  of  Vol.  II.  of 
Thorold  Rogers'  edition). 

"  See  H.  C.  Adams'  Introduction  to  State  Railroad  Control 
by  F.  H.  Dixon. 


236  EXTENSION  OF  THE  STATES  CONTRACTUAL  INCOME. 

various  commonwealths.  The  first  period  of  railroad 
history  in  this  country  covers  the  two  decades  between 
1830  and  1850,  when  railway  building  was  in  its  infancy, 
and  when  most  lines  lay  each  entirely  within  a  single 
state.  The  construction  and  operation  of  both  railways 
and  canals  were  in  the  hands  of  public  ofificials.  The 
result  of  this  attempt  was  failure,  complete,  indubitable, 
and  humiliating.  Vast  debts  had  been  contracted  for 
the  construction  of  these  works,  and  the  states  had  to 
face  the  humiliating  alternative  of  bearing  crushing  taxes 
or  repudiating  their  debts.^  The  memory  of  this  experi- 
ment has  long  ago  vanished  from  the  public  mind,  but 
the  lesson  which  the  experiment  taught  has  been  indeli- 
bly embedded  in  the  constitutions  of  most  of  our  states. 
These  fundamental  charters  were  overhauled  and  very 
generally  amended  by  hard  and  fast  limitations  put  upon 
the  employment  of  the  states'  credit.  Thus  a  practically 
complete  severance  of  the  state  governments  from  all 
participation  in  industrial  ventures  was  effected.  The 
period  which  followed,  from  1850  to  1870,  saw  the  pri- 
vate corporation  arise  and  undertake  the  work  of  railway 
construction  and  extension.^  The  belief  in  private  and 
corporate  initiative  as  the  surest  guarantee  of  needed 
railroad  facilities  was  largely  the  result  of  a  hard 
bought  experience,  and  not  the  outcome  of  mere 
unthinking  inclination  or  haphazard  experiment.  The 
railroad  corporations  tried  successfully  during  this  pe- 
riod to  obtain  public  money  and  extensive  grants 
of  land  from  towns,  counties,  or  municipalities.  The 
Pacific  roads  received  direct  aid  from  Congress;    but, 

*  For  an  account  of  this  movement,  see  H.  C.  Adams,  Public 
Debts,  p.  Z17  sq.  .   ,  ,  ,  ,  , 

'  These  periods  apply  mamly  to  the  northern,  central,  and 
western  states.  The  southern  states,  notably  Missouri,  aided 
railroads  as  late  as  1868. 


PEDER/1L  RAILIV/IY  REGUUTION.  2 37 

with  all  these  exceptions,  the  public  policy  was  to  keep 
the  hands  of  the  state  off,  and  to  encourage  the  develop- 
ment of  the  railway  system  by  giving  private  corpora- 
tions the  fullest  opportunities  to  construct  roads.  Many 
of  the  railroad  charters  contained  stipulations  prescrib- 
ing the  maximum  charges  that  might  be  imposed,  but 
the  public  relied  mainly  upon  the  number  of  competing 
carriers  by  rail  to  escape  the  extortionate  demands  of 
a  transportation  monopoly.  "  Set  the  railroads  at  each 
other's  throats,"  argued  the  public,  "  and  we  shall  get 
fair  play.'' 

From  this  complaisant  attitude  the  shock  of  awaken- 
ing was  most  rude  and  unpleasant.  But  in  1870,  after 
an  enormous  mileage  had  been  laid  down,  and  com- 
panies had  multiplied  by  the  score,  complaints  about 
railroad  rates,  especially  in  the  middle  West,  became  too 
violent  to  be  longer  disregarded.  Since  that  time  we 
have  been  conscious  of  the  existence  of  a  railroad  prob- 
lem, for  which  the  mere  unshackled  competition  of  rival 
carriers  is  no  solution,  and  we  have  made  various  efforts, 
mostly  legislative,  to  solve  it.  The  Granger  agita- 
tion, as  the  movement  in  the  West  was  called,  was  not 
only  a  protest  "  against  the  high  aggregate  charge 
imposed  by  the  companies,  but  against  the  monstrous 
inequalities  of  charge."  ^  Not  only  were  special  rates  ac- 
corded where  there  existed  natural  causes,  such  as  water 
competition  or  the  competition  of  other  railroads  (which 
might  justify  or  palliate  the  discrimination),  but  special 
rates  were  made  to  certain  places  and  to  certain  people 
without  the  least  warrant  in  reason  or  justice,  and  often 
to  the  extreme  detriment  or  ruin  of  other  shippers.  Pub- 
lic opinion,  too,  was  alarmed  at  the  beginning  of  the 
process  of  "  pooling,"  while  the  lavish  grant  of  passenger 

*A.  B.  Sticknev,  The  Railway  Problem,  p.  24. 


238  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

passes  but  added  fuel  to  the  flame.  The  uprising  against 
railroads  occurred  in  various  states  about  the  same  time, 
and  there  were  two  important  results  of  these  earlier 
struggles.  One  was  the  affirmation  by  the  Supreme 
Court  that  railroads  are  by  their  nature  affected  with  a 
public  interest;  that  the  legislature  is  the  guardian  of 
that  interest,  and  may  (subject  to  constitutional  restric- 
tions) control  by  commissions  or  otherwise  the  fixing  of 
rates  and  the  operation  of  the  roads.  The  other  result 
of  prime  importance  was  the  creation  of  railroad  com- 
missions in  many  of  the  states.  Some  of  these  commis- 
sions had  little  power  except  that  of  investigating 
and  making  public  their  conclusions.  This  apparently 
was  only  "  the  power  to  scold,"  but  where  the  commis- 
sion, like  that  of  Massachusetts,  was  able  and  impartial, 
and  where  more  conservative  traditions  ruled  amongst 
railroad  men,  the  advisory  commission  through  its  in- 
fluence on  public  opinion  often  proved  to  be  powerful 
for  good.  In  other  states,^  as  in  Illinois,  the  state  rail- 
road commission  was  intrusted  with  mandatory  powers, 
and  was  given  authority  to  alter  or  fix  rates.  The 
states  very  generally  had  passed  statutes  declaring  that 
all  rates  must  be  reasonable,  and  that  facilities  should  be 
afforded  where  possible  for  continuous  carriage  by  the 
interchange  of  traffic.  Discrimination  in  every  form  had 
been  stringently  forbidden,  and  in  a  number  of  the  states 
the  law  prohibited  a  carrier  from  charging  more  for  a 
short  haul  than  for  a  long  haul  over  the  same  line  in  the 
same  direction,  the  circumstances  and  conditions  of  the 
haul  being  substantially  similar.  This  proviso  was  in- 
tended  to   prevent   discrimination   against   local   traffic. 

*  See  Dixon,  State  Railroad  Control,  for  an  account  of  Iowa's 
experiments  with  railroad  coiniiiissions;  also  J.  W.  Million, 
State  Aid  to  Railways  in  Missouri. 


FEDERAL  RAILIVAY  REGULATION.  239 

While  it  is  difficult  to  generalize  about  the  work  of  state 
railroad  commissions,  and  while  it  must  be  admitted  that 
much  stringent  legislation  by  crippling  the  companies 
hurt  the  shippers  no  less  than  the  carriers,  it  seems 
probable  that  the  state  commissions  effected  a  diminu- 
tion in  railroad  discrimination.  Complaints  on  that 
score,  while  they  have  never  ceased,  became  less  numer- 
ous, though  this  was  doubtless  due  in  part  to  the  fact 
that  a  certain  redistribution  of  population  was  effected 
by  migration  to  the  localities  favored  in  the  matter  of 
rates. ^  The  difficulty  which  all  state  commissions  were 
alike  powerless  to  meet  was  the  existence  of  discrimina- 
tion in  the  case  of  traffic  which  passed  from  one  state 
into  another.  The  regulation  of  such  interstate  traffic  was 
jealously  reserved  by  the  decisions  of  the  federal  courts  to 
Congress,  and  the  state  commissions  found  themselves 
simply  impotent  to  prevent  discrimination  upon  the 
greater  part  of  the  tonnage  moved  by  rail.  Very  naturally 
there  arose  a  cry  for  the  federal  regulation  of  railroads, 
and  in  March  1885  a  select  committee  of  the  United  States 
Senate  was  appointed  to  investigate  the  question  of  in- 
terstate commerce.  That  committee,  with  Senator  Cul- 
lom  at  its  head,  began  and  successfully  prosecuted  a 
searching  inquiry  into  the  subject.  Their  report  con- 
clusively showed  that  practically  all  of  the  complaints 
against  the  railroads  were  traceable  to  the  practice  of 
discrimination.  Upon  the  basis  of  this  report  the  Inter- 
state Commerce  Act  was  drafted,  was  passed  by  Con- 
gress, and  went  into  effect  in  April  1887. 

This  act,  which  is  still  the  basis  of  our  federal  regula- 

'  "  Statistics  show  that  between  1870  and  1890  the  increases  in 
population  in  Illinois,  Wisconsin,  Iowa,  and  Minnesota  were  in 
cities  which  had  competitive  rates;  and  that  non-competitive 
places  decreased  in  popuJ^tion." — A,  B,  Stickney,  Th^  Railro^4 
Problem,  p.  62, 


240  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

tion  of  railroads,  is  in  part  only  declaratory  of  the  com- 
mon law  of  carriers.  It  requires  all  rates  to  be  reason- 
able, and  prohibits  all  kinds  of  pooling  of  traffic  or  of 
the  earnings  therefrom.  To  this  extent  the  statute 
simply  reenacts  the  common  law.^  Beyond  this  the  act 
proceeds  to  forbid  all  kinds  of  discrimination  in  rates, 
and  prohibits  the  exaction  of  any  greater  compensation 
for  transportation  for  a  shorter  than  for  a  longer  distance 
over  the  same  line  in  the  same  direction  under  substan- 
tially similar  circumstances  and  conditions.  This  is 
commonly  known  as  "  the  long  and  short  haul  clause," 
whose  operation  may  be  suspended  at  the  discretion  of 
the  Interstate  Commerce  Commission.  This  body  was 
created  by  the  act,  and  consists  of  five  members  ap- 
pointed by  the  President.  They  are  clothed  with  power 
to  enforce  the  provisions  already  mentioned.  They  are 
also  required  to  see  that  rates  and  fares  of  interstate 
carriers  are  printed  and  made  public,  and  have  authority 
to  inquire  into  the  management  of  the  business  of  such 
carriers  either  at  their  own  instance  or  on  petition  of 
a  plaintiff  alleging  that  he  is  injured  by  the  violation  of 
the  law.  The  statute  also  prescribes  penalties  for  dis- 
obedience, and  outlines  various  methods  of  procedure 
necessary  for  the  enforcement  of  the  provisions  of  the 
act. 

The  federal  Interstate  Commerce  Commission  has  now 
been  in  existence  for  more  than  ten  years,  and  there  seems 
to  be  little  likelihood  of  its  speedy  abolition.  Like  most 
experiments  of  a  similar  sort  it  has  neither  justified  the 
fears  of  its  early  antagonists  nor  met  the  expectations 
of  its  most  sanguine  promoters.    The  commission's  own 

*  Pooling  has  been  regarded  as  a  contract  in  restraint  of  trade 
and  hence  against  public  policy.  The  only  change  made  by  this 
law  was  to  affix  specific  penalties  to  pooling. 


FEDERAL  RAILIVAY  REGULATION.  24* 

Utterances  ind'cate  that  the  existing  law  does  not  give 
them  sufficient  power  to  do  the  good  they  might,  while 
the  acquiescence  of  railroad  men  in  the  present  state  of 
things  would  indicate  that  they  do  not  find  their  oper- 
ations very  seriously  hampered  by  the  commission.  It 
would  be  impossible  without  going  into  the  subject  at 
great  length  to  weigh  carefully  the  effect  of  the  com- 
mission's work  in  the  last  decade.  It  must  suffice  to  say, 
in  passing,  that  both  the  commission  and  the  railroad 
companies  recognize  that  the  Interstate  Commerce  Act 
fails  to  touch  the  real  source  of  the  railroad  problem — 
the  control  over  the  fixing  of  rates.  Where  the  commis- 
sion has  done  good  is  in  dragging  to  light  the  practice 
of  discrimination,  personal  and  local,  and  in  mitigating 
the  evil  of  unjust  discrimination  while  conceding  the 
necessity  of  discrimination  which  is  founded  in  reason. 
The  declaration  of  the  statute  that  all  rates  must  be 
reasonable  has  proved  to  be  a  mere  brutuni  fidmen,  for 
the  fall  in  railroad  charges  has  been  due  to  causes  over 
which  positive  law  exercises  no  control.  The  enforced 
publicity  of  rates  has  been  rendered  ineffective  by  the 
filing  of  thousands  of  tariffs  amendatory  to  previous  rate 
sheets.  Few  have  the  temerity,  the  time,  or  the  curiosity 
to  examine  the  shapeless  bundle  of  rate  sheets  which 
hangs  limp  and  repulsive  in  the  ordinary  passenger  sta- 
tion, and  the  persistent  and  apparently  ineradicable 
granting  of  special  rates  or  rebates  to  favored  shippers 
makes  the  published  freight  rates  of  little  significance  to 
anv  except  the  printer.  The  long  and  short  haul  pro- 
vision is  frequently  suspended  with  the  sanction  of  the 
commission.  It  is  perhaps  more  often  violated  without 
the  commission's  knowledge.  The  anti-pooling  clause 
has  come  in  for  more  severe  criticism  than  any  other 
single  section  of  the  law.     It  has  been,  however,  to  all 


24:  EXTENSION  OF  THE  STATE  S  CONTRACTUAL  INCOME. 

intents  and  purposes,  evaded  by  the  action  of  various 
traffic  associations  comprising  companies  which  volun- 
tarily maintain  rates  designed  to  equitably  divide  traffic 
between  them. 

The  Argument  for  Federal  Acquisition  and  Operation 
of  Railroads. — The  argument  for  a  stale  railroad  system 
m  the  United  States  is  of  necessity  an  argument  for  the 
federal  ownership  and  operation  of  that  system.  The 
very  number  of  states  composing  the  Union,  the  in- 
numerable ties  of  common  interest  between  them,  and 
the  total  absence  of  any  constitutional  power  in  the 
commonwcaltlis  to  touch  interstate  commerce  make  the 
ownership  and  control  of  transportation  agencies  by  half  a 
hundred  states  and  territories  unthinkable.  The  argument 
for  federal  ownership  is  based  upon  an  indictment  of 
the  present  railroad  system.^  To  this  indictment  there 
are  three  main  counts  which  allege  that  the  present  or- 
ganization of  railway  transportation  is  inseparably  bound 


Mention  ought  Iiere  to  be  made  of  the  proposal  of  federal 
ownership  and  operation  made  by  President  Blackstone  of  the 
Chicago  and  Alton  Railroad  in  the  annual  report  for  1890.  The 
demand  for  state  railroads  is  generally  made  in  the  interest 
(real  or  supposed)  of  the  public.  President  Blackstone,  how- 
ever, suggests  federal  purchase  and  control  in  the  interest  of 
investors  in  railroads.  "Under  present  conditions,"  he  says, 
"  the  politicians  dictate  railroad  management,  and  those  who 
have  been  so  unwise  as  to  invest  their  money  in  railroads 
suffer  the  loss.  Apparently  the  people  see  no  wrong  in  this, 
etc."  I  cannot  help  suspecting  that  this  advocacy  of  state  rail- 
roads was  either  the  outcome  of  peculiarly  exasperating  cir- 
cumstances then  rife,  or  that  there  is  a  bit  of  irony  at  the  bottom 
of  it  ali.  No  one's  vision  of  the  whole  railway  question  is 
keener  than  that  of  the  C.  &  A.'s  president.  He  wrote  a 
correspondent  in  1891  as  follows:  "If  I  correctly  understand 
the  matter,  the  real  objection  to  government  ownership  and 
management  of  railroads  is  based  upon  the  belief  in  the  minds 
of  the  people  that  they  cannot  trust  politicians  with  the  man- 
agement of  railroads  under  conditions  which  would  require  the 
people  to  sufYcr  losses  resulting  from  their  mismanagement."  See 
G.  H.  Lewis,  National  Consolidation  of  the  Railways,  p.  188, 


PEDERyiL    OPERATION  OF  RAILROADS.  243 

up  with  (i)  unjust  discrimination,  (2)  competitive  waste, 
and  (3)  unendurable  extortion.  These  charges  must  be 
considered  seriatim. 

(i)  Discrimination  by  railroad  companies  may  take 
two  forms,  local  and  personal.  Local  discrimination  is 
imposing  upon  the  traffic  of  certain  places  rates  which 
apparently  are  relatively  unfair  as  compared  with  the 
rates  imposed  upon  the  traffic  of  other  places.  Personal 
discrimination  consists  in  charging  different  shippers  in 
the  same  locality  different  amounts  for  substantially 
similar  services.  Obviously  either  kind  of  discrimina- 
tion may  be  effected  through  the  agency  of  freight  clas- 
sifications. Goods  which  ought  in  all  fairness  to  be  put 
in  the  same  class  may  be  put  arbitrarily  into  different 
classes  and  subjected  to  different  charges;  or  a  special 
rate  may  be  conceded  upon  some  article  only  when 
shipped  from  a  particular  town,  though  this  concession 
may  work  injury  to  other  places  not  similarly  circum- 
stanced. The  most  common  form  of  making  discrimina- 
tions, however,  is  by  giving  discounts,  special  rates,  and 
rebates  to  favored  shippers.  Passenger  passes  instance 
one  of  the  most  irritating  kinds  of  personal  discrimi- 
nation, though  they  are  not  very  important  in  the 
aggregate. 

This  part  of  the  indictment  drawn  against  the  carriers 
contains  a  great  amount  of  truth.  It  is  admitted  that  a 
considerable  amount  of  apparent  discrimination  against 
certain  localities  is  justified.  Either  the  competition  of 
water  routes  or  of  foreign  (e.g.  Canadian  or  Mexican) 
railroads  renders  inevitable  a  lower  rate  on  through 
traffic  than  other  places  not  served  by  a  number  of  car- 
riers have  any  right  to  demand  or  expect.  Even  when  the 
company  charges  less  for  hauling  freight  from  New  York 
to  San  Francisco,  for  instance,  than  for  hauling  the  same 


244  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

load  over  the  same  line  from  New  York  to  Ogden  (Utah)i 
the  seeming  disparity  may  be  inevitable  and  right.^  There 
can,  however, be  no  question  of  the  fact  that  in  many  cases 
the  surcharge  upon  local  trafific  is  capable  of  no  pallia- 
tion. It  is  extortion  pure  and  simple.  Nor  can  there  be 
any  doubt  of  the  existence  to-day  of  thousands  of  special 
rates,  rebates,  and  discounts  made  to  favored  shippers 
in  violation  of  the  law.  No  one  can  begin  an  inquiry 
on  that  score  without  finding  special  rates  at  almost 
every  other  turn.  On  the  other  hand  it  seems  probable 
that  the  evil  of  discrimination  is  less  extensive  and 
less  irritating  than  it  was  twenty  years  ago.  In  1879 
the  New  York  City  local  freight  agent  of  the  New  York 
Central  and  Hudson  River  Railroad  admitted  that 
"  there  was  no  such  thing  as  a  tariff  for  the  whole  of 
the  local  freight  carried  over  that  line  within  the  state 
of  New  York,"  and  that  "  every  rate  was  a  special  rate 
varying  according  to  circumstances  and  conditions,"  ^ 
The  growing  conservatism  of  railroad  companies  them- 
selves has  had  much  to  do  with  abating  the  evils  of  ex- 
travagant discrimination.  Some  companies  have  real- 
ized that  charging  moderate  rates  for  non-competitive 
freight  is  in  general  a  prudent  device  for  building  up 
local  traffic.  On  the  whole,  we  may  say  that  while  it 
would  be  Utopian  to  expect  to  see  discrimination  alto- 
gether disappear,  still  it  is  evident  that  the  evils  from  this 
source  have  somewhat  abated.  Twenty-five  years  ago 
there  was  a  general  outcry  over  discrimination,  each  ship- 
per fearing  that  he  was  worse  abused  than  his  neighbor; 
to-day  the  public  complaints  on  the  score  of  discrimina- 

'  Alexander,  Railway  Practice,  p.  16. 

"This  has  been  so  decided  by  the  Interstate  Commerce 
Commission,  In  re  Louisville  and  Nashville  Railroad  Company. 
See  the  Commission's  Annual  Report  lor  1890,  p.  139. 

'Simon  Sterne  in  "The  Citizen  "  for  Sept.  1896. 


FEDERAL   OPERATION  OF  RAILROADS.  2 AS 

tion  are  far  less  noisy  and  frequent.  Each  shipper  deludes 
himself  with  the  idea  that  he  has  secured  the  lowest 
rate.  Should  the  practice  of  unjust  discrimination  again 
grow  virulent,  the  remedy  proposed  by  Mr.  Stickney  ^ 
might  become  law.  This  would  allow  the  Interstate 
Commerce  Commission,  upon  convicting  a  company  of 
unjust  discrimination,  to  operate  the  road  through  a  re- 
ceiver until  ample  security  had  been  given  against  any 
repetition  of  the  offence. 

When  all  is  said  in  mitigation  of  the  practice  of 
discrimination,  it  must  be  allowed  that  the  evil  is 
very  grave,  and  perhaps  impossible  of  extirpation 
so  long  as  roads  are  operated  by  private  corpora- 
tions. The  evil  exists  in  England  ^  as  well  as  in  the 
United  States,  and  would  seem  to  be  the  inevitable  re- 
sult of  a  competitive  railroad  system. 

(2)  Competitive  Waste.  The  advocates  of  state  rail- 
roads do  not  content  themselves  with  unearthing  the  in- 
justice now  wrought  through  unjust  discrimination. 
They  allege  that  the  corporate  operation  of  railroads  is 
a  wasteful  system,  and  that  the  wrong  it  perpetrates  by 
granting  special  rates  and  secret  rebates  is  aggravated 
rather  than  offset  by  the  unnecessary  waste  of  the  na- 
tion's resources  which  railroad  rivalry  entails.  In  par- 
ticular they  assert  that  railroads  are  now  frequently  built 
where  they  are  not  needed,  or  before  they  are  needed ; 
that  the  motive  which  prompts  to  their  construction  is 
to  blackmail  existing  companies  into  buying  the  new 
road  on  pain  of  losing  traffic ;  that  the  value  of  a  new 
road  depends  not  on  its  power  to  serve  the  public,  but 
on  "  its  power  to  do  mischief " ;  that  the  building  of 
roads   through   the   agency   of   construction   companies 

*  Cf .  The  Railway  Problem,  p.  211. 

*Cf.  J.  S.  Jeans,  Railway  Problems,  p.  293. 


246  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

in  the  United  States  is  replete  with  corruption  and  ex- 
travagance ;  that  the  cost  of  construction  and  operation 
is  less  on  state  railroads  than  on  private  roads,  and  that 
the  rivalry  of  competing  carriers  necessitates  the  main- 
tenance of  many  extensive  staffs,  and  numerous  other 
competitive  agencies  which  might  be  cut  down  or  abol- 
ished were  the  system  entirely  in  the  hands  of  the  gov- 
ernment. 

It  is  undoubtedly  true  that  many  single  instances  may 
be  cited  wliich  go  to  illustrate  the  foregoing  contentions, 
but  it  is  doubtful  if  such  instances  in  the  aggregate  are 
sufficient  to  prove  the  general  allegation  of  the  greater 
wastefulness  of  the  present  system  over  the  state  system. 
The  testimony  on  the  cost  of  railroad  construction  by 
the  state  and  by  private  companies  respectively  is  drawn 
almost  entirely  from  foreign  experience  and  is  far  from 
being  conclusive.^  Very  much  the  same  must  be  said 
about  the  testimony  bearing  upon  the  cost  of  operation 
of  state  and  private  roads.  There  is  something  to  be 
said  for  the  contention  that  the  joint  operation  of  the 
railroads,  the  telegraphs,  and  the  post  (as  in  Prussia) 
affords  an  opportunity  for  economy  through  unity  of 
administration  and  extended  division  of  labor.  On  the 
other  hand  it  is  notorious  that  it  is  more  difficult  in 
slack  times  to  discharge  unnecessary  agents  from  the 
state  civil  service  than  from  a  private  concern.  At  all 
events  the  variations  in  the  cost  of  operating  railroads 
in  different  countries  seem  to  indicate  that  there  are 
factors  of  much  greater  importance  in  determining  the 


*  Picard  (Traite  des  Chemins  de  Fer,  I.,  p.  539)  pronounces 
the  following:  guarded  conclusion:  "A  tons  ces  points  de  vue, 
nous  considerons  la  construction  par  I'fitat  comme  donnant 
des  resultats,  sinon  superieurs,  au  moins  egaux  a  ceux  de  la 
construction  par  les  concessionnaires." 


FEDERAL   OPERATION   OF  RyllLROADS.  247 

cost  of  operation  than  the  character  of  the  directing 
agency.^ 

Unquestionably  there  is  in  all  competition  a  certain 
amount  of  expenditure  purely  wasteful  when  considered 
by  itself.  The  maintenance  of  huge  advertising  bureaus, 
the  multiplication  of  ticket  agencies,  the  vast  commis- 
sions paid  to  freight  and  passenger  promoters,  the  diver- 
sion of  traffic  over  circuitous  lines,  especially  during 
railway  "  wars,"  the  rapid  change  in  rates  (happily  less 
frequent  than  formerly),  and  the  disastrous  gambling  in 
railroad  securities  must  all  be  recognized  as  among  the 
social  costs  of  competitive  railroading.  Still  it  remains 
an  open  question  after  all  whether  these  wasteful  ex- 
penditures are  not  the  inevitable  concomitants  of  com- 
petition, which,  be  its  drawbacks  what  they  may,  is  the 
most  reliable  guarantee  yet  evolved  of  cheap  and  efficient 
transportation. 

(3)  Extortion.  The  charge  preferred  against  the  pres- 
ent railroad  system  on  the  score  of  widespread  and 
systematic  extortion  may  be  dismissed  with  but  few 
words.  It  is  of  course  conceded  that  numberless  instances 
are  on  record  where  railroad  companies  have  used  their 

^  Leroy-Beaulieu  (Traite  des  Finances,  I.,  p.  104  sq.)  argues 
for  the  superior  economy  of  corporate  management.  He  points 
out  that  the  ratio  of  net  receipts  to  gross  receipts  per  mile 
operated,  (coefficient  d'exploitation)  is  less  on  private  roads 
than  on  state  roads  in  Europe  generally.  This  would  indicate 
that,  ceteris  paribus,  it  takes  a  greater  fraction  of  gross  earnings 
to  pay  expenses  on  state  lines  than  on  private  lines.  Jeans 
(Railway  Pro'blems,  p.  461  sq.)  cites  tables  to  prove  that  on 
private  lines  a  greater  percentage  of  the  total  working  expenses 
is  laid  out  on  the  administrative  staff  and  traffic  expenses  than 
is  the  case  on  state  lines.  The  maintenance  of  way  on  the 
other  hand,  he  admits,  absorbs  a  greater  part  of  the  total 
expenditure  on  state  roads  than  on  private  roads,  though  he 
ascribes  this  to  the  superior  care  taken  of  state  roads.  Picard 
(Traite  des  Chemins  de  Fer,  I.,  p.  624)  asserts  that  the  co- 
elticient  d'exploitation,  when  all  circumstances  are  considered, 
is  about  the  same  in  France,  Belgium,  and  Germany. 


248  EXTENSION  OE  THE  STATE'S  CONTR/fCTUAL  INCOME. 

monopoly  power  to  exact  the  last  cent  that  could 
be  wrung-  from  the  helpless  shipper.  But  a  comparison 
of  our  railroad  charges,  both  passenger  and  freight,  with 
those  levied  on  Continental  lines  will  effectually  dispel 
the  idea  that  the  average  charge  for  transportation  in 
the  United  States  is  exorbitant.  It  is  easy  to  attach 
too  much  importance  to  these  statistical  averages;  but  it 
was  estimated  that  in  1892  while  the  average  rate  per 
passenger-mile  in  Europe  (including  Great  Britain)  was 
1.93  cents,  the  corresponding  charge  in  the  United  States 
was  2.143  cents.  On  the  other  hand,  while  the  average 
"European  freight  charge  per  ton-mile  was  2.02  cents,  the 
average  rate  in  this  country  was  0.967  cents. ^  Equally 
significant  is  the  steadily  decreasing  rate  of  freight  earn- 
ings per  ton-mile  in  the  United  States,  the  decline  being 
from  0.839  cents  in  1895  to  0.821  cents  in  1896.2  In 
view  of  these  considerations  and  of  the  very  moderate 
average  rate  of  earnings  on  the  real  capital  invested  in 
our  railroads,  the  cry  about  exorbitant  dividends  result- 
ing from  general  extortion  falls  flat.^ 

The  advocates  of  state  roads  do  not  generally  content 
themselves  with  descanting  upon  the  evils  ingrained  in 
a  competitive  system,  but  usually  cite  the  success  of 
state  railroads  (Prussia  and  Austria  are  favorite  illus- 
trations), as  a  clinching  argument  in  favor  of  inaugurat- 
ing a  similar  system  in  the  United  States.  Without 
attempting  here  to  rebut   this  assertion  of  the  success 

^  These  comparisons  are  taken  from  Facts  and  Figures  by 
J.  H.  Benton.  The  Statistician  to  the  Commission  (Report  for 
1805,  p.  75)  makes  the  average  revenue  fiom  freight  per  ton- 
mile  in  the  United  States,  in   1892,  but  0.898  cents. 

'"  Poor's  Manual  of  Railroads  for  1897. 

'"The  deficit  for  the  year  ending  June  30,  1S94,  was  $45,- 
851,294.  showiny^  that  the  railroads  have  run  behind  during  the 
two  years  in  question  $75,696,535.  Should  this  continue,  either 
the  investments  or  the  credits  of  railways  must  disappear." 
Statistics  of  Railways  in  the  United  States  for  1895,  p.  58, 


THE  ARGUMENT  AGAINST  STATE  RAILROADS.      249 

o\  state  systems  elsewhere,  or  to  break  the  force  of  the 
argument  by  alluding  to  conspicuous  failures  of  state 
systems  (in  Italy  or  Victoria  for  example),  it  may  not 
be  amiss  to  point  out  that  a  state  system  superimposed 
on  what  was  originally  a  competitive  system  hardly  gives 
a  fair  index  of  what  state  railroads,  pure  and  simple,  are 
likely  to  be  and  do.  He  is  a  rash  judge,  moreover,  who, 
even  though  he  be  convinced  of  the  success  of  an  in- 
dustrial experiment  in  one  nation,  argues  that  differences 
in  national  character,  political  habits,  and  business 
usages  are  likely  to  prove  disturbing  factors  of  but 
minor  importance  when  the  same  venture  is  tried  again 
under  other  skies. 
The   Argument  against  State  Railroads.  1 — At  the  risk 

^  Certain  compromise  systems  seeking  to  secure  the  advan- 
tages of  both  state  and  private  railways  without  the  defects  of 
either  have  from  time  to  time  been  proposed.  Lack  of  space 
prevents  more  than  the  merest  mention  of  some  of  them. 
Competent  opinion,  however,  seems  adverse  to  their  practica- 
bility. The  scheme  of  having  a  part  of  the  railway  system 
owned  and  operated  by  the  government  has  been  tried  in  Bel- 
gium and  in  Prussia.  It  was  supposed  that  the  private  com- 
panies would  be  held  in  check  by  the  necessity  of  meeting  the 
competition  of  state  lines.  The  actual  outcome  was  very 
dififerent.  In  Belgium  the  private  roads  set  the  pace,  and  the 
state  roads  were  compelled  to  follow.  (See  Hadley.  Railroad 
Transportation,  p.  214  sq.)  The  government  was  finally  com- 
pelled to  buy  up  the  greater  pirt  of  the  independent  lines,  and 
to  enter  into  pooling  arrangements  with  the  remainder.  In 
Prussia  it  would  appear  that  the  competition  offered  by  the  state 
roads  had  in  some  instances  very  seriously  lessened  the  earning 
power  of  private  lines,  even  to  the  extent  of  a  partial  confis- 
cation of  certain  properties.  These  lines  were  afterwards  pur- 
chased by  the  state.  (See  von  der  Leven  in  Conrad's  Hand- 
worterbuch.  Bd.  I.,  pp.  176,  177).  Permanent  regulation  of 
private  companies  hv  the  concurrent  competition  of  independent 
state  lines  seems  to  be  impossible. 

Some  have  advocated  a  plan  which  would  combine  state 
ownership  of  railwavs  with  their  operation  bv  private  companies 
leasing  the  roads  from  the  state.  The  Italian  system  is,  in  a 
way,  built  on  this  foundation.  It  is  found,  however,  that  such  a 
lease  must  be  conceded  for  a  long  term  of  years.  The  requi- 
site amount  of  capital  will  not  be  invested  unless  some  guarantee 


2 so  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME 

of  burning  our  bridges  behind  us  at  the  outset,  we  mav 
preface  the  case  against  state  railroads  by  conceding  that 
much  of  the  milder  and  tentative  legislation  against  rail- 
road abuses  has  proved  abortive.  Especially  true  is  this 
of  laws  setting  maximum  rates  for  railway  service,  and 
of  laws  limiting  the  dividends  of  railway  companies. 
Self-interest  in  the  first  case  has  generally  been  sufficient 
to  induce  the  companies  to  ask  rates  below  the  maxima 
legally  set.  In  the  second  case,  where  railway  earnings 
have  been  large  enough  to  pay  dividends  whose  rate  ex- 
ceeded that  fixed  by  law,  some  device  such  as  the  issue 
of  watered  stock  has  commonly  served  to  transfer  the 
extra  earnings  to  the  stockholder's  pockets  without  any 
infraction  of  the  letter  of  the  statute.  The  limitation  of 
dividends  in  certain  cases  may  even  operate  against  the 
public  interest,  for  if  railway  earnings  and  dividends  can 
be  increased  by  a  reduction  in  railway  rates,  both  the 
public  and  the  railroad  owners  will  gain  thereby,  whereas 
a  limitation  of  dividends,  if  enforced,  may  serve  not  only 
to  keep  railway  incomes  down,  but  also  to  keep  railway 
rates  up. 

If,  then,  laws  limiting  rates  and  dividends  are  univer- 
sally ineffectual,  and  laws  against  unjust  discrimination 
are  frequently  evaded  or  defied,  we  must  admit  that  a 

is  made  of  the  investment's  duration.  In  Italy,  for  example,  the 
leases  run  for  sixty  years,  and  to  vacate  them  twenty  years' 
notice  is  necessary.  The  idea,  therefore,  that  the  state,  by  being 
the  legal  owner  of  the  railways,  can  exercise  any  effective 
control  over  a  tenant,  who  cannot  be  ousted  until  after  a 
generation,  is  evidently  illusory.  (See  von  Scheel  in  Schoen- 
berg's  Handbuch,  Bd.  III.,  p.  93).  The  plan  of  having  the 
government,  instead  of  purchasing  the  railways  outright,  lease 
the  roads  and  operate  them,  differs  only  technically  from  com- 
plete ownership  and  management.  Instead  of  paying  interest 
on  the  purchase  money  borrowed  to  buy  the  property,  the  state 
would  pay  an  annual  rental  for  its  use.  Indeed  this  may  be 
considered  as  a  species  of  state  railroads  rajther  than  a  com- 
promise system. 


THE  ARGUMENT  AGAINST  STATE  RAILROADS.       251 

certain  persistence  of  unjust  discrimination  as  well  as 
of  competitive  waste  seems  under  present  circumstances 
to  be  inevitable.  The  economic  surd  resists  all  attempts 
at  elimination.  But  whether,  in  despair  of  a  complete 
solution  on  present  lines,  we  are  ready  to  assume  that 
stat.e  management  is  the  inevitable  remedy  remains  for 
consideration.  Wagner  urges  with  great  force  against 
a  private  system  of  railways  that  their  management  is 
necessarily  dictated  by  the  peremptory  demands  of  pri- 
vate profit.i  A  "  beneficent  despot,"  if  intrusted  with  the 
management  of  a  national  railway  system,  would  not  be 
exclusively  actuated  by  the  motive  of  increasing  the  net 
earnings  of  the  railroad  companies.  Rates  that  merely 
cover  cost  or  which  perhaps  result  in  actual  loss  that 
taxation  must  make  good,  may  conceivably  imply  an  in- 
crease in  general  well-being  so  great  as  to  dwarf  the 
temporary  loss  of  dividends  to  the  investors.  Where 
the  state  owns  and  operates  the  roads,  it  is  not,  in  deter- 
mining railway  charges,  shut  up  in  a  narrow  place  like 
the  private  corporation,  but  with  freer  hand  and  more 
far-sighted  vision  may  prescribe  rates  designed  to  secure 
the  greatest  public  good.  This  possibility,  however, 
would  be  realized,  it  must  be  remembered,  only  to  the 
degree  in  which  the  government  approximated  an  all- 
wise  and  "  beneficent  despot."  Make  concrete  our  idea 
of  government  by  calling  to  mind  that  it  consists  to  all 
intents  and  purposes  of  two  rather  numerous  bodies  of 
men  of  like  passions  as  the  rest  of  us,  with  conflicting 
views  upon  most  subjects,  and  united  mainly  in  "going  in 
for  the  old  flag  and  an  appropriation,"  each  for  his  own 
section,  and  we  may  easily  understand  how  far  our  gov- 

'  "  Der  Vortheil  beim  Staatsbahnwesen  besteht  jedoch  eben 
darin.  dass  eine  solche  V^erwaltung  nach  dem  rein  gewerblichen 
Grundsatz  nicht  unbedingt  notig  ist."  Finanzwissenschaft,  Bd. 
I.,  p.  659. 


252  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

ernment  falls  short  of  the  stature  of  the  "  beneficent 
despot  "  required.  It  is  absurd  to  think  we  ever  shall 
have  a  government  that  docs  all  things  well.  The  most 
we  have  any  right  to  expect  is  one  which  does  but  few 
thiiigs  mischievously.  For  this  very  reason  we  may 
with  a  good  conscience  renounce  the  hypothetical  possi- 
bility of  good  inherent  in  state  railway  management,  and 
fling  ourselves  boldly  into  the  arms  of  competition.  It 
is  true  that  each  and  every  system  will  accordingly  be 
run  with  an  eye  single  to  corporate  profits.  But  if  cheap 
and  efficient  transportation  results  therefrom,  we  shall 
have  solid  compensation  for  the  nebulous  possibilities 
of  good  we  have  foregone.  Does  a  competitive  railway 
regime  result  in  cheap  and  efficient  transportation?  Of 
the  efifectiveness  of  private  initiative  to  lay  out  and  con- 
struct the  original  network  there  is  little  question.  The 
advocates  of  state  systems  seem  to  forget  that  there  is  one 
thing  worse  than  having  railroads  operated  ill,  and  that 
is  not  having  them  operated  at  all ;  and  no  more  indis- 
putable claim  can  be  made  for  private  initiative  than  that, 
where  allowed  free  play,  it  has  speedily  and  intelligently 
furnished  the  necessary  trans])ortation  facilities.  Gov- 
ernments have  practically  conceded  their  inferiority  to 
private  companies  in  the  matter  of  projecting  and  build- 
ing the  original  lines;  and  where  the  lack  of  private 
enterprise  has  compelled  governments  to  take  up  the 
work  of  construction,  it  has  been  chiefly  in  those  nations 
where  the  spirit  of  industrial  self-reliance  and  venture- 
someness  has  been  traditionally  repressed.  Lord  Farrer, 
a  competent  judge  of  the  matter,  testifies  that  the  "  devel- 
opment of  railway  communication  in  Great  Britain  has 
been  such  as  no  government  management,  however 
good,  could  possibly  have  produced."  ^     "  In  railroad- 

*  The  State  in  Relation  to  Trade,  2-  io9- 


POOLING.  253 

ing,"  says  Mr.  Croker,  the  chairman  of  the  Massachu- 
setts Board  of  Railroad  Commissioners,  "  competition 
has  wrought  the  work  of  improvement  more  wonderfully 
than  in  any  other  industry."  ^  Evidence  has  already 
been  cited  to  show  how,  in  the  United  States,  rates  have 
been  steadily  reduced  until  they  are  as  a  whole  unrivalled 
for  cheapness.  Whatever  be  the  ultimate  character  of 
our  railway  system,  the  judgment  of  the  future  can  hardly 
fail  to  acknowledge  the  wisdom  of  the  past  in  that  with 
singular  clear-sightedness  our  century  has  realized  its 
own  great  need,  to  wit,  cheap,  extensive,  and  efficient 
transportation,  which  it  has  secured  by  a  courageous 
and  thoroughgoing  reliance  upon  private  agencies  act- 
ing under  a  fierce  competitive  pressure.  It  is  true  that 
we  trusted  to  competition  to  secure  what  it  could  not 
secure,  namely,  rates  based  on  cost  of  service.  It  is  true 
that  we  relied  on  competition  to  prevent  injustice,  or 
relative  extortion,  as  between  shipper  and  shipper.  In 
both  cases  our  hopes  were  grounded  on  the  sand.  But 
the  net  result  has  convincingly  vindicated  our  policy  in 
the  past.  Rates  are  cheaper  than  any  system  of  basing 
them  on  cost  of  service  would  have  secured;  and  if  the 
persistence  of  unjust  discrimination,  and  of  occasional 
railroad  dishonesty,  and  the  thousand  and  one  abuses  of 
power  may  give  us  real  apprehension  for  the  future,  we 
may  on  the  other  hand,  from  the  survey  of  what  has 
already  been  accomplished,  find  abundant  ground  for 
hope. 

Pooling. — A  careful  analysis  of  what  we  may  reason- 
ably expect  from  competition  in  the  future  brings  us 
very  near  the  heart  of  the  real  "  railroad  problem  "  of 
to-day.  The  possibilities  of  public  good  involved  in 
competition  are  so  vast  that  any  proposal  to  curtail  its 

•The  Railroads  and  the  Public,  p.  7. 


254  EXTENSION  Of  THE  STATES  CONTR/iCTUAL  INCOME. 

free  play  is  justly  the  subject  of  prima  facie  suspicion. 
Still  we  have  seen  that  competition  has  been  incapable  of 
securing  universally  that  reasonable  equity  in  railway 
rates  which  positive  law  contemplates.  Mr.  A.  B.  Stick- 
ney  and  others  go  so  far  as  to  say  of  competition  in 
railroading  that  "  where  it  prevents  extortion  it  pro- 
duces discrimination."  Evidently  the  results  of  such 
competition  are  not  all  of  a  kind.  It  remains  therefore 
to  inquire  what  its  detrimental  efifects  are  and  whether 
any  bounds  should  be  set  to  its  operation.  To  be  health- 
ful, industrial  competition  in  transportation  must  evi- 
dently secure  not  only  efficient  service  to  the  public  at 
reasonable  rates,  but  to  the  investor  such  a  return  as 
will  guarantee  the  extension  of  transportation  facilities 
when  and  where  such  extensions  are  needed.  Nor  ought 
such  healthful  competition  to  involve  a  destructive  pres- 
sure upon  competent  rivals  or  any  part  of  the  public. 
Such  healthful  competition  in  railroading  cannot  be 
secured  without  the  violation  or  circumvention  of  the 
anti-pooling  clause  of  the  present  Interstate  Commerce 
Act.  The  reasons  are  these.  Railroad  systems  in  this 
country  constitute  an  interlaced  network  of  lines.  A 
change  in  the  rate  sheets  of  any  one  line  inevitably  oper- 
ates upon  the  traffic  receipts  of  other  lines.  The  bound- 
aries of  the  various  territories  drained  by  these  arteries 
of  commerce  are  thus  arbitrarily  dislocated  by  changes 
in  a  single  rate  sheet.  The  volume  of  competitive  traffic 
is  reshifted,  the  stream  seeking  an  enlarged  outlet  over 
the  line  which  has  cut  its  rates,  until  a  retaliatory  cut 
has  been  made  by  other  companies.  Thus  the  equilib- 
rium of  the  whole  transportation  s}stem  may  be  dis- 
turbed by  any  one  of  four  or  five  hundred  independent 
rate  making  bodies.  Of  course  this  is  true  of  small  pro- 
ducers of  manufactured  goods  where  a  cut  in  prices  must 


POOLING.  25  s 

be  met  by  competing  producers.  But  the  capital  invested 
in  such  enterprises  is  relatively  small,  and  continued 
sales  below  cost  mean  speedy  dissipation  of  the  capital 
and  equally  speedy  elimination  of  reckless  or  incompe- 
tent producers.  Hence  cost  forms  a  level  below  which 
such  prices  cannot  remain  for  any  length  of  time.  The 
immense  capital  invested  in  railroads,  and  the  practical 
impossibility  of  ceasing  to  operate  them,  when  bank- 
rupt, prolong  the  evil  of  excessive  railroad  competition, 
and  prevent  the  total  disappearance  of  the  competing 
road.  It  may  be  absorbed,  if  bankrupt,  by  its  successful 
rival,  which  becomes  thereby  absolved  in  a  measure  from 
the  necessity  of  setting  reasonable  rates;  or,  if  the  bank- 
rupt road  is  reorganized  by  an  independent  corporation, 
the  battle-ground  is  but  prepared  again  for  a  struggle 
like  the  first,  unless  through  some  joint  arrangement 
the  companies  agree  upon  a  modus  vivendi. 

The  necessity  of  meeting  cut-throat  competition  for 
competitive  traffic  impels  roads  having  a  virtual  mo- 
nopoly over  the  traffic  of  certain  districts  to  extort  from 
this  traffic  the  highest  practicable  return.  Thus  they 
shift  a  certain  part  of  the  competitive  pressure  upon  un- 
fortunate shippers  or  localities.  It  is  undoubtedly  true  that 
many  shippers  and  the  general  public  enjoy  low  rates  dur- 
ing a  railroad  war.  But  the  fluctuations  produced  first 
by  the  carriers'  cuts,  and  then  by  the  arbitrary  increase 
of  rates  resulting  from  the  patching  up  of  a  temporary 
truce,  are  fatal  to  all  commercial  calculations  based  upon 
steady  freight  charges.  Besides  the  element  of  uncer- 
tainty thus  introduced  into  all  business  where  freight 
charges  are  a  considerable  item,  the  disappearance  of 
railway  profits  in  the  immediate  present  acts  as  a  brake 
upon  the  extension  of  railway  facilities  in  the  future. 
Hence  the  idea  that  railway  wars  are  public  benefits  is 


25^  EXTENSION  OF  THE  ST/iTE'S  CONTRACTUAL  INCOME, 

lamentably  short-sighted.  The  truth  is  that  competition 
among  railway  carriers  has  been  so  extreme  that  the 
public  interest  no  longer  consists  in  spurring  them  on 
to  internecine  strife,  but  rather  in  legalizing  their  pooling 
arrangements,^  without  which  the  companies  must  con- 
tinue a  policy  ruinous  to  themselves  and  dangerous  as 
well  to  the  public.  It  was  owing  to  the  fear  of  mo- 
nopoly that  the  anti-pooling  clause  was  incorporated  in 
the  Interstate  Commerce  Act.  But  this  provision  tended 
to  perpetuate  and  even  to  augment  that  discrimina- 
tion which  it  was  the  main  object  of  the  law  to  destroy. 
The  competition  which  the  anti-pooling  clause  sought  to 
foment  gave  the  carriers  a  new  motive  to  discriminate 
where  possible,  in  order  thereby  to  lessen  their  losses 
on  competitive  traffic.^  The  law  enjoined  upon  the  car- 
rier the  duty  of  undeviating  competition,  and  then 
turned  around  and  sought  to  deprive  him  of  the  only 
means  of  recouping  the  losses  which  such  unflagging 
competition  inflicted  upon  him.  The  only  avenues  of 
escape  from  bankruptcy  were  consolidation  of  compet- 
ing roads,  or  evasion  of  the  anti-pooling  clause.  The 
possible  danger  inherent  in  pooling  is  the  imposition  of 
extortionate  charges  by  the  companies.  But  this  dan- 
ger is  rather  imaginary  than  real.  Rates  fixed  by  pool- 
ing agreements  must  conform  to  the  requirement  of 
being  "  reasonable  and  just,"  and,  unless  the  law  were 

*  Pooling  arrangements  take  different  forms.  The  most  com- 
mon form  is  a  vokmtary  acquiescence  on  the  part  of  carriers 
in  differential  rates  recommended  by  a  Joint  Traffic  Association 
Board,  or  similar  body  composed  of  representatives  of  the 
various  roads.  These  rates  are  based  upon  the  length  of  route 
and  the  character  of  service  of  the  respective  roads.  The  earlier 
pools  sought  to  divide  joint  earnings,  or  to  distribute  competi- 
tive territory,  or  to  fix  each  road's  share  of  the  total  volume 
of  trafific. 

'  Cf.  H.  T.  Newcomb's  article  in  the  Popular  Science  Monthly 
for  Oct.  1897. 


POOLING.  257 

Otherwise  chang^ed,  would  continue  to  be  subject  to  re- 
view by  the  federal  comniission.  There  is  also  evidence 
to  show  that  "  as  a  rule  the  rates  on  pooled  traffic  have 
been  reasonable  and  equitably  adjusted,  and  have  been 
brought  into  comparatively  harmonious  relations  with 
local  rates."  ^  Nor  must  it  be  imagined  that  the  legiti- 
mation of  such  pooling  contracts  would  destroy  com- 
petition. The  competition  of  carriers  by  water  would 
still  continue.  Even  with  the  stiffest  maintenance  of 
differential  rates,  the  competitive  struggle  would  largely 
persist  in  the  form  of  offering  to  shippers  and  passengers 
superior  railway  facilities.  Whatever  be  the  ultimate 
outcome  of  the  railroad  problem,  one  thing  is  certain, 
that  the  possibility  of  deranging  all  rates  at  the  mere 
caprice  of  any  one  of  several  hundred  rate  fixing  bodies 
cannot  continue.  Exactly  how  this  chaos-breeding 
power  will  be  chained  it  is  difficult  to  say.  It  may  be 
that  hard  won  experience  will  make  carriers  voluntarily 
conform  to  rates  recommended  as  at  present  by  traffic 
associations.  It  may  be  that  specific  rates  based  on 
the  principle  of  making  aggregate  earnings  cover  ag- 
gregate expenses  will  be  prescribed  and  enforced  by  the 
federal  commission.^  It  is  possible  that  the  actual  con- 
solidation of  all  systems  under  a  single  board  of  control 
will  destroy  conflicting  interests  by  unifying  them.    Sev- 

^  W.  D.  Dabney,  The  Public  Regulation  of  Railways,  p.  152. 

*Mr.  A.  B.  Stickney  in  Ch.  XIX  of  the  Railway  Problem, 
argues  that  there  is  no  other  remedy.  Prof.  H.  C.  Adams  has 
advocated  a  similar  plan.  He  suggests  that  the  Commission 
might  (i)  determine  the  proper  total  income  of  railway  com- 
panies; (2)  the  share  of  traffic  naturally  belonging  to  each 
company;  (3)  a  uniform  classification  of  freight;  and  determine 
(4)  on  each  class,  rates  that  should  be  sufficient  when  multiplied 
by  the  physical  volume  of  traffic  to  produce  the  aggregate 
income.  (See  Compendium  of  Transportation  Theories  edited 
by  C.  C.  McCain,  p.  134  sq.)  To  suggest  only  one  of  a  thou- 
sand difficulties,  how  would  such  rates  be  aflfected  by  largq 
unforeseen  fluctuations  in  the  volume  of  traffic  ? 


258  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

eral  ineffectual  attempts  at  a  solution  have  already  been 
made.  The  federal  commission  has  been  foiled  in  its 
attempt  to  prescribe  in  advance  specific  rates  to  be  ob- 
served by  carriers ;  and  the  efforts  made  hitherto  by 
carriers  to  establish  mutual  agreements  to  maintain 
reasonable  rates  have  been  annulled  by  the  decisions  of 
the  Supreme  Court.  The  Interstate  Commerce  Act,  so 
the  Supreme  Court  has  decided,  confers  upon  the  com- 
mission no  power  to  prescribe  rates  for  the  future  ;i  and 
the  Anti-Trust  Law  of  July  2,  1890  (in  the  opinion  of  the 
same  tribunal)  prevents  a  railroad  company  from  enter- 
ing into  any  combination  with  competing  roads  even  to 
maintain  reasonable  rates.2  These  decisions  apparently 
block  progress  along  their  respective  lines  so  long  as 
the  statutes  concerned  stand  unrepealed  or  unamended, 
but  in  some  way  the  control  over  the  fixing  of  rates  must 
be  secured. 

The  advocacy  of  pooling,  then,  is  far  from  being  an 
admission  of  the  failure  of  competitive  railroading.  The 
necessity  for  pooling  is  rather  an  index  of  the  thorough- 
ness with  which  competition  has  done  its  work  in  the 
past.  Moreover,  the  compatibility  of  such  pooling  ar- 
rangements with  cheap  and  efficient  transportation  is  a 
strong  argument  against  governmental  experimentation 
with  railroads. 

The  Political  Aspect  of  the  Question. — If,  by  proving 
the  indispensable  advantages  of  reasonable  competition, 
a  tolerably  strong  argument  for  retaining  our  present 
system  of  private  railroads  may  be  made,  a  conclusive 
demonstration  of  the  folly  of  a  federal  railroad  system 

'  In  re  Interstate  Commerce  Commission  vs.  The  Cincinnati, 
New  Orleans  and  Texas  Pacific  Railway  Co.  et  al. 

^  In  re  U.  S.  vs.  The  Trans-Missouri  Freight  Association  et  al. 
For  a  clear  presentation  of  both  decisions  see  Prof.  E.  R. 
Johnson's  article.  Current  Transportation  Topics,  in  Annals  of 
the  American  Academy,  Sept.  1897, 


THE  POLITICAL  ASPECT  OF  THE  QUESTION.      t59 

may  be  drawn  from  weighing  the  poHtical  dangers  which 
such  a  system  must  certainly  entail. 

The  dangers  of  a  national  railroad  system  are  many. 
It  would  miraculously  multiply  the  "  loaves  and  fishes  " 
for  the  politicians  to  dispense ;  it  would  make  transpor- 
tation facilities  the  football  of  political  "  dickers  " ;  it 
would  plunge  the  Treasury  into  straits  whenever  there 
came  a  slump  in  railroad  earnings;  and,  worse  than  all 
else,  it  would  raze  to  the  ground  our  constitutional  struc- 
ture based  on  a  balance  of  power  between  the  govern- 
ment and  the  people. 

Let  us  endeavor  to  substantiate  these  propositions. 
The  Statistician  to  the  Interstate  Commerce  Commission 
reported  that  on  June  30,  1897,  there  were  in  all  823,476 
men  in  the  employ  of  the  railroads  of  the  United  States.^ 
Substantially  800,000  citizens,  representing  a  population 
of  about  4,000,000  souls,  would  become  employes  in  the 
federal  civil  service  under  a  state  railway  regime.  This 
number  added  to  the  present  civil  service  roll  would 
make  the  total  number  of  places  under  the  federal  gov- 
ernment largely  in  excess  of  1,000,000.  The  advocates 
of  state  roads  when  confronted  with  this  situation  try 
to  meet  it  by  saying  that  all  these  800,000  places  must, 
of  course,  be  filled  under  a  system  of  competitive  exami- 
nations. Obviously  there  would  be  thousands  of  places 
that  could  not  be  thus  filled.  The  more  important  posi- 
tions, the  superintendencies  of  divisions  and  the  like, 
would  be  conceded  to  be  the  proper  political  patronage 
of  every  administration.  Promotions  and  transfers 
would  afiford  another  mass  of  plunder  to  the  politicians. 

The  maintenance  of  the  reforms  already  effected  in 
the  public  civil  service  is  no  easy  labor ;    and  the  exten- 

^  Statistics  of  Railways  in  the  United  States,  1897,  p.  Z7- 
The  number  employed  in   1896  was  826,6.20. 


26o  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

sion  of  the  competitive  system  of  appointments  and  pro- 
motions to  a  field  indefinitely  vaster  than  the  present 
one  might  not  improbably  prove  a  superhuman  task. 
To  argue  that  the  inefficiency  of  partisan  railroad  ser- 
vice would  make  patent  the  necessity  of  the  merit  sys- 
tem, and  w^ould  thus  lead  to  an  overwhelming  popular 
demand  for  the  universal  establishment  of  the  merit  sys- 
tem in  the  administration  of  state  railroads,  does  not 
appear  to  be  a  very  cogent  argument.  Popular  opinion 
in  America  will  always  demand  and  obtain  a  very 
considerable  degree  of  administrative  efficiency  even 
from  a  partisan  civil  service.  Indeed  it  may  fairly  be 
doubted  whether  the  superior  efficiency  and  economy  re- 
sulting from  a  non-partisan  civil  service  are  more  im- 
portant than  the  elevation  of  politics  which  results  from 
the  merit  system.  Place  and  power  are  and  always  will 
be  the  incentives  to  political  activity.  The  political  ex- 
perience of  our  race  has  demonstrated  the  necessity  of 
limiting  by  constitutional  prohibitions  the  power  of  our 
rulers.  We  are  beginning  to  learn  the  wisdom  of  limit- 
ing the  places  to  be  scrambled  for  in  the  political  mclec. 
It  is  therefore  doubtful  whether  a  partisan  railway  ad- 
ministration would  be  so  inefficient  as  to  engender  an 
indefeasible  clamor  for  extending  the  merit  system  to 
the  public  railway  service.  Even  if  such  a  movement 
arose,  the  "  vested  interests  "  of  the  vast  army  of  incum- 
bents might  easily  block  the  attempted  reform.  How- 
ever, even  though  ^ve  concede  that  the  government  rail- 
way service  would  be  ultimately  brought  under  the  merit 
system,  the  dangers  that  might  arise  from  the  united 
action  of  a  compact  body  of  a  million  government  em- 
ployes are  not  illusory.  The  fact  that  a  man  got  his 
position  by  merit  is  no  guarantee  that  he  will  not  try 
to  raise  his  salary  by  political  agitation.     The  bidding 


THE  POLITICAL  ASPECT  OF  THE  QUESTION.       261 

for  the  "  labor  vote  "  (with  which  we  are  already  fa- 
miliar) would  be  child's  play  to  the  havoc  wrought  by 
bidding  for  the  railroad  vote.  When  Congress  sets  the 
wages  for  a  million  men,  somebody's  fingers  are  going 
to  get  burned;  and  whose  they  will  be  we  may  judge 
from  our  pension  experience.  There  are  indeed  those 
who  are  hardy  enough  to  suggest  that  the  railway  em- 
ployes of  the  government  "  forego  suffrage,"  or,  as 
President  Blackstone  in  semi-ecclesiastical  phrase  puts 
it,  that  "  railroad  operators  ...  be  in  no  greater  degree 
under  the  influence  of  politicians  or  political  parties  than 
the  army  militant."  The  "  army  militant,"  it  may  be  re- 
marked in  passing,  has  numbered  in  times  of  peace  about 
25,000  men.  To  suggest  wholesale  disfranchisement  of 
a  million  citizens  is  puerile :  and  to  hope  for  their  polit- 
cal  indifiference  when  rival  parties  are  riotously  bidding 
for  their  votes  is  to  hug  a  delusion.  The  dilemma  is 
plain.  A  state  railway  system  must  adopt  the  merit 
system  or  reject  it.  If  the  merit  system  be  rejected,  we 
invite  the  politicians  to  go  through  our  pockets ;  if  the 
merit  system  be  adopted,  the  very  number  of  state  rail- 
road employes  and  their  conscious  power  will  tempt 
them  to  go  through  our  pockets.  In  the  second  place 
a  regime  of  state  railroads  in  this  country  would  imply 
the  submission  of  rate  fixing  to  political  influences.  The 
pressure  now  exerted  on  congressmen  to  secure  legis- 
lation for  special  sections  is  admitted.  Not  an  appro- 
priation bill  for  rivers  and  harbors  passes  Congress  but 
it  is  loaded  with  special  favors  of  this  kind.  Not  a  tariff 
measure,  whether  protective  or  otherwise,  has  passed 
Congress  in  this  generation  but  special  interests,  indus- 
trial and  sectional,  have  employed  it  as  an  engine  for 
legislative  favoritism.  Let  the  fixation  of  transportation 
rates  and  facilities  be  flung  into  the  political  arena,  and 


262  EXTENSION  OF  THE  STATES  CONTRACTUAL  INCOME. 

ihe  "  woes  unnumbered  "  of  tlie  unrepresented  nation  at 
large  may  be  faintly  conjectured.  It  does  very  well  to  say 
that  a  federal  railway  system  will  make  the  t^^overnment 
the  guardian  of  every  interest,  the  patron  saint  of  inves- 
tor, shipper,  employe,  and  every  compctiny^  interest, 
but  it  is  tolerably  safe  to  predict  that  the  very  struggle 
of  locality  with  locality  and  of  interest  with  interest  for 
preference  in  the  matter  of  rates  will  soon  reveal  in  this 
general  benefactor  a  universal  scourge.* 

The  Financial  Aspect  of  the  Question. — Lastly,  the 
purely  financial  tasks  of  the  Treasury  would  become 
freighted  with  insurmountable  dangers.  The  total 
ordinary  federal  expenditure  at  present  is  in  the 
neighborhood  of  $350,000,000  a  year.  The  capital  in- 
vested in  railroad  property  in  the  United  States  is  es- 
timated at  $11,000,000,000.  In  case  the  federal  govern- 
ment in  order  to  purchase  this  property  issued  bonds  to 
this  amount,  the  interest  upon  so  stupendous  a  debt 
would  more  than  double  the  total  annual  expenditures. 
To  offset  this  increased  expenditure  the  government 
would  receive  the  earnings  of  the  railroads.  In  times  of 
commercial  depression  these  earnings,  sometimes  for 
several  years  running,  are  a  negative  quality.  Even  as- 
suming that  the  government  administration  is  as  eco- 
nomical as  that  of  the  railroad  corporations,  the 
necessity  of  paying  off  each  year  some  part  of  the  prin- 
cipal of  the  debt  incurred  for  the  purchase  of  the  roads 
would  about  absorb  the  surplus  of  net  earnings  over 
interest  charges.  It  may  readily  be  surmised  that  the 
Secretary  of  the  Treasury  in  a  lean  year  would  have  a 

'  Picard  (Traite  des  Chemins  de  Fer.  I.,p.625)  remarks  sagely: 
"  Quci  (lu'il  en  soit,  sur  ce  point  comme  sur  celui  que  nous  dis- 
cutions  precedemnicnt.  il  est  dilncile  d'envisager  sans  ciuelque 
apprehension  rintluence  que  pourraient  avoir  en  France  les 
pressions  politiques  sur  le  nombre  des  trains,  la  consistence  du 
personnel  et  les  autres  elements  du  prix  de  revient  de  I'ex- 
ploitation." 


THB  PlhlANCML   /IsrLcr  Of    IHE   question.        2^3 

riddle  to  read,  an  easy  answer  to  which  would  be  Re- 
pudiation. 

All  of  the  dangers,  however,  which  inhere  in  a  federal 
railroad  system  but  constitute  the  greater  danger  al- 
ready adverted  to,  of  building  up  a  bureaucracy  dis- 
proportionate to  our  political  system,  and  of  intrusting 
to  the  government  a  power  so  great  as  to  dwarf  the  in- 
dividual units  balanced  against  it.  Professor  H.  C. 
Adams  has  put  this  admirably  where  he  says  ^  :  "  The 
question  involved  is  a  constitutional  and  not  an  indus- 
trial question.  The  discussion  pertinent  to  the  problem 
takes  into  consideration  the  influence  which  government 
ownership  of  a  railway  will  have  upon  the  fundamental 
structure  of  the  state.  The  Constitution  of  the  United 
States  is  unique  in  that  it  aims  to  guarantee  the  con- 
tinuance of  liberty  through  a  balance  between  the  vari- 
ous governmental  powers ;  and  .  .  .  the  great  body  of 
the  American  people  hold  to  the  political  ideas  expressed 
in  the  Constitution.  More  than  this  is  true.  Not  only 
is  the  theory  of  the  balance  of  governmental  powers 
relied  upon  for  the  perpetuation  of  political  liberty,  but 
the  conception  of  a  balance  as  between  governmental 
functions  on  the  one  hand  and  industrial  functions  on 
the  other  is  accepted  as  a  criterion  of  a  justly  organized 
society.  .  .  .  The  administration  of  railroads  by  govern- 
ment would  increase  the  importance  of  the  administra- 
tive department  of  government  as  compared  with  the 
other  departments,  and  it  would  also  throw  so  prepon- 
derating an  influence  into  the  hands  of  government  as 
to  destroy  the  hope  of  maintaining  any  just  balance  be- 
tween governmental  and  individual  interests." 

The  last  resort  of  the  advocate  of  state  railroads  is  to 
argue  from  the  successful  management  of  the  post-office, 

*  Introduction  to  Dixon's  State  Railroad  Control,  pp.  13,  14. 


264  EXTENSION  OF  THE  STATE'S  CONTRACTUAL  INCOME. 

or  the  brilliant  administration  of  Prussian  railroads, 
that  our  federal  government  is  able  to  undertake  the 
business  of  transportation.  The  many  differences  be- 
tween the  post  and  the  railroads  have  already  been  ex- 
plained, and  the  analogical  argument  that  Prussian 
success  with  railroads  presages  similar  good  fortune  for 
our  federal  government  in  a  similar  venture  is  far  from 
conclusive.  If  we  are  to  make  use  of  analogy  as  a  guide 
in  such  matters,  the  experiment  which  deserves  our  most 
careful  study  is  the  English  experiment  with  the  tele- 
gi-aphs.  Here  was  a  nation  whose  industrial  habits 
were  most  nearly  like  our  own.  Here  was  an  industry 
whose  acquisition  cost  far  less  than  the  railroads,  and 
whose  administration  was  immensely  simpler.  More- 
over, conservative  financial  opinion  had  pronounced  in 
favor  of  the  experiment.  So  careful  a  student  as  Jevons 
had  concluded  that  state  telegraphs  would  be  successful 
largelv  for  the  same  reasons  which  had  made  the  state 
management  of  the  post  successful.^  It  was  found, 
however,  that  tlio  economics  secured  by  unity  of  man- 
agement were  ofifsct  by  the  higher  salaries  paid  to  em- 
ployes, and  that  the  government  had  to  obtain  a 
monopoly  for  the  state  telegraph,  though  formerly  such 
an  intention  had  been  disclaimed.  The  financial  faihire 
of  the  experiment  is  hardly  in  question.  A  successful 
pressure  of  the  telegraph  personnel  for  higher  pay,  and 
an  invincible  demand  by  the  public  for  lower  rates, 
proved  to  be  the  u]5per  and  nether  millstones  between 
which  the  financial  success  of  the  undertaking  was 
ground  to  powder.^ 

'Compare  Jevons,  Methods  of  Social  Reform,  p,  281. 
^  Bastable,  Pulilic  Finance,  i>p.  197,  198. 


CHAPTER    XL 
MUNICIPAL    MONOPOLIES. 

Nature  of  Urban  Monopolies.  — "  All  the  conditions 
that  made  a  uniform  system  of  local  self-government 
possible,"  Mr.  Wilcox  ^  tells  us,  were  "  swept  away  by 
the  rise  of  cities."  He  might  have  added  that  the  con- 
ditions which  made  a  uniform  system  of  industrial  com- 
petition feasible  were  also  largely  shattered  by  this  same 
exodus  from  the  country  to  the  town.  For  as  the  grow- 
ing concentration  of  population  into  cities  at  once  created 
a  closer  dependence  of  social  welfare  upon  intelligent 
city  government,  so  the  very  fact  of  urban  residence 
created  a  milieu  in  which  the  beneficent  force  of  free  and 
equal  competition  could  no  longer  freely  '  orb  about.' 
The  machinery  of  the  town  meeting  could  not  cope  with 
the  inert  masses  to  be  moved  within  great  manufactur- 
ing and  commercial  centres,  nor  could  the  unrestricted 
industrial  rivalry  of  an  agricultural  era  afTord  an  ade- 
qva^-e  rule  of  economic  policy  for  the  growing  munici- 
pality. With  the  growth  of  cities  came,  of  necessity, 
the  concurrent  growth  of  the  city  plant.  The  old  villasre 
lanes  were  transformed  into  thoroughfares  paved, 
graded,  and  curbed.  Public  buildings  were  multiplied. 
Public  bridges,  and  markets,  and  docks,  and  wharves, 
and  ferries  supplanted  earlier  and  ruder  contrivances. 
The  uncouth  rural  constable  gave  way  to  the  uniformed 

*  Study  of  City  Government,  p.  9. 

265 


^66  MUNICIPAL  MONOPOLIES 

patrolman,  and  in  place  of  the  voluntary  hose  company 
came  the  salaried  fire  department. 

It  is  hardly  surprising  that  in  a  period  of  such  rapid 
material  progress  there  should  have  been  fev^^  misgiv- 
ings about  the  danger  of  extortionate  charges  for  ser- 
vices which  city  residents  were  sure  to  require.  The 
levelling  efifect  of  industrial  competition  upon  prices  had 
exerted  a  sedative  or  at  least  a  reassuring  influence  upon 
city  people ;  and  they  were  slow  to  grasp  the  fact  that 
in  certain  important  urban  industries  the  action  of  com- 
petition is  impeded  or  wholly  checked.  They  understood 
from  the  first  that  the  city  was  a  governmental  organ  of 
the  state,  but  they  assented  only  gingerly  to  the  broad 
doctrine  that  the  city  was  also  the  normal  minister  to 
peculiar  local  needs.  They  assumed  that  their  of^cials 
would  employ  a  part  of  the  city  plant,  such  as  the  public 
administrative  buildings  and  the  schools,  and  would 
render  gratuitous  services  in  connection  therewith.  But 
the  citizens  generally  saw  nothing  inconsistent  with  this 
policy  in  granting  (often  in  perpetuity,  and  without  any 
remuneration)  the  use  of  another  and  greater  part  of 
the  city  plant,  to  wit,  the  streets,  to  companies  or  cor- 
porations whose  object  was  to  make  money  by  supply- 
ing the  city  with  water,  gas,  electricity,  or  the  means  of 
local  transit. 

If  the  times  of  this  ignorance  cannot  now  be  '  winked 
p'  '  they  may  at  least  be  partly  condoned.  When  fran- 
chises were  originally  accorded,  entitling  the  grantee  to 
the  use  of  the  streets,  the  necessity  for  the  services  to 
be  rendered  was  often  urgent,  the  success  of  the  project 
was  often  doubtful,  and  the  monopoly  character  of  the 
privilege  was  often  but  dimly  perceived.  Many  city  gov- 
ernments pursued  the  somewhat  illogical,  if  on  the  whole 
advantageous,  policy  of  supplying  the  city  with  water, 


N/tTURE  OF  URBAN  MONOPOLIES.  267 

while  turning  over  to  private  companies  the  business  of 
supplying  the  citizens  with  light  and  transportation.  Th^; 
necessity  of  an  adequate  water-supply  was  too  imperative 
and  too  obvious  to  wholly  escape  public  attention  and 
interest  even  at  the  first,  and  it  was  naively  imagined  that 
extortionate  charges  for  other  services,  if  imposed  by  a 
private  company,  would  speedily  call  into  existence 
plenty  of  rivals  to  whom  it  would  be  but  necessary  to 
grant  a  similar  use  of  the  streets  in  order  to  bring  down 
prices  to  a  competitive  level.  This  proved  to  be  a  mistake. 
it  was  found  in  the  first  place  physically  impossible  to 
lay  more  than  a  certain  number  of  car  tracks  upon  the 
surface  of  the  street,  or  more  than  a  certain  number  of 
pipes  and  wires  below  that  surface.  In  the  second  place, 
this  perpetual  tearing  up  of  the  public  thoroughfares, 
with  the  consequent  interruption  of  public  traffic,  was  an 
intolerable  nuisance.  In  the  third  place,  the  apportion- 
ment of  the  city  between  competing  companies  render- 
ing public  service  gave  the  public  far  less  efficient 
service  than  could  be  rendered  through  a  single  manage- 
ment. Competing  street-car  lines,  for  instance,  would 
naturally  not  give  transfers  upon  each  other ;  whereas 
a  single  system  could  frequently  be  coerced  into  con- 
ceding such  a  privilege.  Moreover,  competition  was  a 
wasteful  system,  as  the  unnecessary  duplication  of  tracks, 
mains,  and  apparatus  showed;  and  to  crown  all,  such 
competition  tended  naturally  to  disappear,  as  consoli- 
dation of  competing  interests  promised  such  obvious  ad- 
vantages to  the  former  competitors. 

In  short,  the  rapid  increase  of  the  city  population  led 
to  the  creation  of  an  immense  public  plant.  The  ser- 
vices connected  with  the  supply  of  water,  gas,  electricity, 
and  local  transportation  involved  the  use  of  portions  of 
this  pubHc  plant.     Such  services  tended  to  become  mo- 


268  MUNIClPylL   MONOPOLIES. 

nopolies,  and  the  attempt  to  raise  up  rivals  to  these  urban 
monopolies  proved  radically  ineffective. 

Choice  of  Policies  — -I'lulcr  conditions  such  as  have 
been  described  tlie  choice  was  forced  upon  our  munici- 
palities of  renderincT  directly  to  their  citizens  such  ser- 
vices as  required  the  use  of  the  streets,  or  of  exacting 
in  the  future  from  private  companies  some  adequate 
compensation  for  their  franchises.  The  water-supply 
had  been  very  generally  undertaken  by  our  city  govern- 
ments ^  and  a  few  cities,  notably  Philadelphia  and  Rich- 
mond, Va.,  had  instituted  municipal  gas-works.  r)Ut  there 
were  in  general  two  great  obstacles  to  the  *  municipali- 
zation '  of  these  public  service  industries.  One  was  the 
widespread  feeling  against  the  government's  entering 
upon  industrial  ventures ;  the  other  was  the  fact  that 
the  public  service  corporations  already  existing  were 
frequently  in  possession  of  privileges  and  concessions 
which  could  not  legally  be  revoked,  nor  bought  back 
except  at  exorbitant  prices.  When  electricity  began  to 
be  used,  American  cities,  either  because  they  had  begun 
to  realize  the  true  nature  of  urban  monopolies,  or,  more 
probably,  because  they  were  moved  by  representations 

*  In  1835  only  27.8  per  cent,  of  the  waterworks  in  the  United 
States  were  owned  by  the  public.  The  percentage  of  publicly 
owned  works  steadily  increased,  being  45.3  in  1855  and  54  in 
1875.  This  is  practically  the  percentage  of  public  waterworks 
at  the  present  time  (1897).  It  is  noteworthy  that  there  are  but 
nine  of  our  fifty  largest  cities  now  supplied  by  waterworks 
owned  by  private  companies.  What  changes  have  been  made 
have  been  in  the  line  of  replacing  private  waterworks  with 
public  plants.  Tke  public  ownership  of  gas  works  is  much 
more  cojnmon  in  England  and  on  the  Continent  than  in  the 
United  States.  In  England  and  Wales  the  private  gas  works 
number  426  to  160  owned  by  the  local  authorities.  It  is  not 
infrequent  to  find  that  the  trackage  of  tramways  in  England 
is  owned  by  cities,  and  let  by  them  to  operating  companies 
which  supply  the  cars  and  service.  Several  municipalities  in  Great 
Britain  have  followed  the  example  of  Glasgow  in  both  owning 
and  operating  their  street-car  lines. 


PUBLIC   OPERATlOhl  vs.    CORPORATE   OPERATION.     269 

of  the  supposed  saving  to  be  effected,  instituted  in  more 
than  a  hundred  instances  municipal  electric  light  plants. 
Even  where  our  cities  have  adhered  to  their  earlier  policy 
of  letting  private  corporations  render  public  services,  the 
city  governments  have  been  more  exacting  than  for- 
merly in  the  various  stipulations  inserted  in  the  fran- 
chises. Originally,  such  franchises  were  to  be  had 
almost  for  the  asking.  In  certain  cases  they  were  per- 
petual instead  of  being  limited  in  duration,  and  they  often 
conferred  what  were  practically  exclusive  rights  to  serve 
certain  localities  or  districts.  Franchises  granted  to-day 
are  likely  to  be  hedged  about  with  many  restrictions.  The 
right  is  frequently  reserved  to  the  city  government  of 
prescribing  the  conditions  and  character  of  the  service 
to  be  rendered ;  the  franchise  is  limited  in  duration,  and 
a  special  tax  of  a  certain  percentage  of  the  gross  receipts 
or  of  the  net  receipts  is  often  inserted.  Even  the  right 
to  ^x  the  prices  to  be  charged  is  not  infrequently  re- 
served to  the  city,  though  the  exercise  of  this  last-named 
right  is  likely  to  be  treated  very  cavalierly  by  the  courts. 

It  is  almost  needless  to  add  that  the  municipal  owner- 
ship and  operation  of  urban  monopolies  is  what  is  vul- 
garly termed  one  of  the  '  burning  questions  '  of  the  day. 
To  assess  the  arguments  for  and  against  such  a  policy 
we  must  have  regard  first,  to  certain  general  considera- 
tions, economic  and  political,  and  thereafter  we  must 
weigh  the  positive  evidence  to  be  drawn  from  experience 
and  statistical  inquiry. 

Direct  Municipal  Service  vs.  the  Franchise  Policy.-^- 
The  advocates  of  direct  municipal  ownership  and  opera- 
tion of  urban  monopolies  hold  out  the  alluring  promise 
of  transmuting  private  profits  into  public  benefits.  The 
supply  of  light  and  water,  no  less  than  local  transporta- 
tion, they  contend,  is  ordinarily  a  monopoly.    The  prices 


270  MUNICIPAL   MONOPOLIES. 

exacted  for  these  services,  they  aver,  are  monopoly 
prices,  sufficient  to  Hne  the  pockets  of  the  private  cor- 
porations with  exorbitant  profits.  Even  admitting  that 
private  watchfnhiess  depresses  cost  below  the  cost  level 
of  municipal  service,  the  consumer,  they  argue,  is  not 
benefited  thereby.  The  pressure  exerted  on  the  cor- 
poration's employe  does  not  lessen  the  consumer's  water- 
rate,  nor  his  gas  bill,  nor  his  car  fare.  Instead  of  help- 
ing either  consumer  or  employe,  the  monopoly,  it  is 
maintained,  robs  the  one  and  tyrannizes  over  the  other. 
And  even  though  it  be  admitted  that  public  manage- 
ment is  less  economical  than  private  control,  still  it  is 
argued  that  the  possible  risk  of  pul)lic  waste  is  slight 
as  compared  with  the  certain  danger  of  corporate 
greed. 

In  criticism  of  this  position  it  may  be  said,  first,  that 
this  elimination  of  private  profit  is  possible,  generally 
speaking,  only  as  regards  enterprises  to  be  established 
in  the  future,  where  the  city  government  assumes  the 
risk  of  failure  as  well  as  of  success ;  secondly,  that  the 
element  of  cost  is  not  the  item  of  trifling  importance  it  is 
represented  to  be,  but  that  it  measures  the  waste  incurred 
in  operating  an  industry,  and  is  therefore  of  cardinal  sig- 
nificance ;  and  thirdly,  that  even  if  public  management 
secured  lower  prices  to  the  consumer  in  the  immediate 
present,  such  a  plan  would  be  dearly  purchased  at  the 
cost  of  slackened  industrial  improvement.  To  illustrate  : 
if  a  street-railway  company  has  a  franchise  which  is  un- 
limited in  duration  and  which  carries  with  it  the  exclu- 
sive right  to  operate  on  certain  thoroughfares,  such  a 
franchise  cannot  be  revoked,  nor  its  value  be  indirectly 
destroyed  by  the  city.  Such  action  would  be  both  un- 
wise, as  endangering  private  property,  and  unconstitu- 
tional, as  it  amounts  to  taking  private  property  without 


PUBLIC  OPERATION  vs.    CORPORATE  OPERATION.     271 

just  compensation.!  If  through  the  exercise  of  the  right 
of  eminent  domain  the  franchise  become  the  property 
of  the  state,  the  price  paid  by  the  city  would  normally 
be  based  on  the  earning  power  which  the  franchise  for- 
merly conferred  on  the  company.  Even  though  the  ex- 
piry of  a  corporation's  charter  should  allow  the  city 
government  to  establish  a  municipal  plant  and  render 
services  directly  to  the  citizens,  the  obvious  utility  of 
acquiring  the  existing  private  plant  would  generally  lead 
the  city  to  pay  a  price  for  it  high  enough  to  cover  and 
more  than  cover  the  cost  of  the  plant's  duplication. 
When  the  city  therefore  is  under  the  necessity  of  making 
the  earnings  of  its  enterprises  cover  the  interest  and 
redemption  of  this  purchase  money,  there  is  no  certainty 
that  such  charges  will  not  prove  fully  as  onerous  as  the 
corporate  profits  from  which  municipal  public  service 
was  intended  to  deliver  us.  Where  there  is  no  necessity 
imposed  on  the  city  of  buying  back  a  franchise,  the  city 
may  be  able  to  furnish  the  service  at  a  smaller  price  than 
the  consumer  would  otherwise  pay.  Still,  such  ventures 
may  prove  to  be  failures,  in  which  case  the  loss  will  have 
to  be  made  good  out  of  the  proceeds  of  taxation  instead 
of  out  of  the  pocket  of  private  investors  as  at  present. 
Finally,  it  is  urged  that  the  substitution  of  public  manage- 
ment for  private  management  would  disparage  that  per- 
sistent search  for  economizing  expedients  and  new  appa- 
ratus, and  thus  in  the  domain  of  urban  monopolies  might 
not  improbably  lead  to  what  John  Stuart  Mill  was  fond 
of  describing  as  "  the  stationary  state." 

The  advocates  of  the  franchise  system  ground  them- 
selves firmly  on  the  high  probability  of  lower  cost  of  ser- 
vice under  private  management  than  under  public,  and 

^  See  article  V  of  Articles  in  addition  to,  and  amendment 
of,  the  Constitution  of  the  United  States, 


272  MUNICIPAL   MONOPOLIES. 

contend  that  this  lower  cost  in  the  present,  and  still  more 
this  constantly  lovvering  cost  in  the  future,  mean  a  mini- 
mum waste  of  social  capital,  and  in  the  long  run  lower 
prices  to  the  consumer  than  direct  public  service  is  ca- 
pable of  affording-.  It  is  hardly  necessary  to  point  out 
tliat,  in  purchasing  supplies  or  in  contracting  for  laI)or, 
private  self-interest,  stimulated  by  the  hope  of  gain  no 
less  than  by  the  fear  of  loss,  will  drive  a  sharper  bargain 
than  will  public  authorities  who  have  nothing  particular 
at  stake. 

Of  even  more  importance  than  holding  down  running 
expenses  to  the  lowest  figure  compatible  with  adequate 
service  is  the  public  gain  derived  from  the  solicitous  in- 
quiry made  by  private  companies  into  improved  kinds 
of    apparatus    and    the    generally    speedy    introduction 
of     such     improvements.       Public     officials     rendering 
industrial    service   to   the   community    may    try    to   pal- 
liate  the   more   obvious   discomforts   attaching   to   anti- 
quated methods ;  they  are  not  especially  likely  to  trouble 
themselves  about  experimenting  with  new  and  promising 
appliances.     The  case  has  been  well  put  recently  bv  an 
expert  in  local  transportation  ^  :    "  Governments  in  gen- 
eral, and  municipalities  in  particular,  are  essentially  con- 
servative in  trying  new  things.     Private  capital,  on  the 
contrary,  is  essentially  eager  to  anticipate  the  future  and 
preempt  all  possibilities  of  profit.     Herein  lies  the  real 
and  fundamental  reason  why  nnmicipal  ownership  and 
operation  of  public  service  enterprises  is  not,  nor  ever 
will  be,  a  success  from  the  broader  points  of  view — from 
the  standpoint  of  the  people's  progress." 

Before  proceeding  to  ask  how  far  these  opposing  eco- 
nomic considerations  are  affected  when  viewed   in  the 

^  Mr.    Edward    K.    Iliggins,    in    Municipal    Affairs    for  Sept. 
•897. 


PUBLIC  OPERATION  vs.    CORPORATE  OPERATION.     273 

light  of  experience,  it  will  be  necessary  to  glance  for  a 
minute  at  the  political  considerations  involved  in  this 
issue.  The  notorious  dishonesty  of  many  of  our  city 
officials,  no  less  than  the  prevalence  of  the  spoils  system 
in  city  politics,  would  seem  at  the  first  blush  to  create  a 
strong  presumption  against  the  public  ownership  and 
operation  of  urban  monopolies.  But  the  advocates  of 
this  policy  fairly  take  the  bull  by  the  horns  when  they 
insist  that  corruption  in  municipal  legislatures  is  very 
largely  rooted  in  the  present  system  under  which  fran- 
chises are  granted,  confirmed,  or  extended.  "  Legisla- 
tive corruption  finds  its  opportunity  in  this  situation, " 
Both  the  city  legislature  (the  council  or  the  board  of 
aldermen)  and  the  private  company  needing  the  fran- 
chise are  tempted  '  beyond  that  they  are  able,'  the  first 
to  sell,  the  last  to  buy,  the  right  to  use  the  streets  for 
a  consideration  which,  however  satisfactory  to  the  im- 
mediate parties  to  the  sale,  almost  always  amounts  to  a 
corrupt  betrayal  of  the  public  interests.  Nothing  com- 
parable to  the  legislative  corruption  in  the  granting  of 
franchises  is  to  be  found,  it  is  contended,  in  the  adminis- 
tration of  public  water-works,  in  the  street-cleaning  ser- 
vice, in  the  renting  of  city  docks,  or  in  similar  public 
undertakings.  Mr.  Albert  Shaw  puts  this  side  of  the 
case  in  a  nutshell  where  he  says  ^  :  "  The  wear  and  tear 
upon  the  morals  of  a  weak  municipal  government  are 
greater  by  far  when  it  comes  to  the  task  of  granting 
franchises — that  is  to  say,  of  making  bargains  with  pri- 
vate corporations — than  when  it  is  attempted  to  carr\ 
out  a  business  undertaking  directly  on  the  public  ac- 
count. ...  In  the  United  States  tl^c  scandals  and  diffi 
culties  attendant  upon  .  .  .  municipal  ownership  .  .  . 
would  not  be  as  great  as  those  involved  in  making  bar 

*  Cf.  Symposium  in  the  Independent,  May  6,  1897, 


2  74  MUNICIPAL    MONOPOLIES. 

gains  between  municipal  governments  and  the  gas  trusts 
and  illumination  companies,  and  in  the  exercise  of  an  al- 
leged public  control." 

The  obvious  reply  to  this  presentation  of  the  matter 
is  that  to  scatter  corruption  is  not  necessarily  to  destroy 
it;  that  public  ownership  and  operation  will  involve 
consta)it  opportunity  for  dishonesty  ;  and  that  the  moral 
standard  of  public  officials  will  not  be  raised  by  merely 
depriving  them  of  the  power  to  grant  franchises.  Indeed 
there  is  much  reason  to  believe  that  under  municipal 
operation  we  should  find  corruption  continuous  instea  1 
of  occasional,  and  efficiency  occasional  instead  of  con- 
tinuous. 

Evidence  Bearing  upon  the  Two  Policies. — It  is  to 
be  feared  that  the  evidence  of  statistics  and  of  concrete 
experience  in  this  matter  will  tend,  as  it  often  does,  to 
confirm  pre-existing  prejudices  rather  than  to  aid  sus- 
pended judgments  to  an  unbiassed  decision.  Sometimes 
it  proves  the  ripest  wisdom  after  the  examination  of  con- 
flicting statistics  ^  to  doubt  them  all  rather  than  to  ac- 

'  The  United  States  Commissioner  of  Labor  Statistics  in 
conjunction  with  the  heads  of  similar  state  bureaus  is  con- 
ducting at  this  time  an  investigation  into  water,  gas  and  elec- 
tric light  plants;  and  will  undertake  to  ascertain  the  cost  to  the 
producer,  and  the  price  to  the  consumer,  of  these  products  under 
public  and  private  management  respectively.  This  will  be  the 
first  ot'ticial  report  covering  the  United  States  that  has  yet  been 
made. 

For  the  statistical  presentation  of  facts  involved,  consult 
Municipal  Affairs  for  March,  1897.  which  contains  a  bibliography 
of  works  on  city  government.  The  same  journal  for  June  and 
September,  1897,  contains  articles  presenting  statistical  evidence 
on  the  points  involved.  Municipal  Ownership:  Its  fallacy, 
by  M.  J.  Francisco;  the  publications  of  the  American  Economic 
Association;  Municipal  Monopolies  and  their  Management,  by 
A.  H.  Sinclair;  and  the  Proceedings  of  the  National  Associa- 
tion of  Officials  of  Bureau  of  Labor  Statistics  in  the  United 
States  for  1896  may  be  consulted  with  profit. 

Especially  sharp-sighted  is  Prof.  Willcox  in  his  remarks  in 
the  Ifist  mentioned  pamphlet,  where,  in  speaking  of  the  difticulty 


EyiDENCE  BEARING   UPON   THE   TIVO  POLICIES.    275 

cept  any.  Especially  is  this  the  case  when  there  are 
many  complicating  factors,  some  of  them  peculiar  to  a 
given  time,  place,  or  form  of  local  government. 

The  evidence  which  purports  to  bear  upon  the  plan 
of  public  operation  as  compared  with  the  franchise  sys- 
tern  ought  to  be  scrutinized  sharply.  Not  only  must 
comparisons  be  made  of  the  prices  charged  the  con- 
sumer, but  the  quality  of  the  service  rendered  and  the 
question  of  cost  must  also  be  investigated.  A  public 
gas  company  which  charges  the  consumer  on  his  gas- 
bill  a  dollar  per  thousand  cubic  feet,  and  which  runs  be- 
hind in  its  current  expenses  so  that  it  must  be  aided  out 
of  the  proceeds  of  taxation,  may  obviously  be  exacting 
more  from  the  consumer  than  a  private  company  which 
charges  a  dollar  and  a  quarter  per  thousand  cubic  feet, 
pays  taxes  on  its  property,  and  is  a  going  concern.  Dif- 
ferences in  local  conditions  also  must  be  borne  in  mind. 
The  cost  of  gas  obviously  depends  largely  on  the  price 
of  coal.  That  in  turn  depends  largely  on  the  geographi- 
cal situation  of  the  gas  plant.  So  that  the  same  charge 
which  in  one  place  might  be  regarded  as  truly  exorbitant 
might  elsewhere  not  cover  the  actual  cost  of  production. 

of  obtaining  reliable  statistical  data  bearing  on  the  problem,  he 
observes:  "  Yet,  on  consideration,  it  appears  that  public  and 
private  plants  do  not  render  the  same  service  except  by  accident, 
and  hence,  assuming  that  the  true  cost  can  be  obtained,  it  would 
be  the  cost  of  diflferent  services.  The  aims  of  public  plants  and 
of  private  plants  are  different.  The  aim  of  a  municipal  plant  is 
primarily  to  satisfy  the  voters,  and  in  subordination  to  that  to  be 
self-supporting  or  remunerative.  The  aim  of  a  private  plant 
is  primarily  to  earn  money  for  the  corporation,  and  in  sub- 
ordination to  that  to  please  the  patrons.  Hence  the  manage- 
ment of  a  public  plant  is  tempted  to  make  it  appear  that  the 
plant  is  remunerative,  by  twisting  the  figures  if  necessary,  and  at 
the  same  time  be  lavish  with  the  light,  as  a  means  of  securing 
the  favor  of  the  voters.  On  the  other  hand,  the  management 
of  a  private  plant  is  tempted  to  keep  its  financial  condition 
secret,  or  to  represent  it  unfavorably  to  the  public,  in  order  to 
prevent  competition  or  municipal  interference." 


27^  MUNICIP/IL  MONOPOLIES. 

Similarly,  the  street-car  trackage  required  for  a  com- 
pactly built  city  like  Glasg-ow  is  not  more  than  a  sixth 
of  that  required  for  a  city  that  spreads  out  like  lirook- 
lyn.  Obviously,  the  difference  in  capital  invested  in  the 
plants  must  be  enormous,  and  differences  in  price  may 
thus  be  justified.  l'>esides  distin,e^uishini^  between  the 
real  and  the  nominal  prices  charged  to  consumers,  and 
after  making  some  rough  allowances  for  differences  in 
local  conditions,  we  must  assure  ourselves,  if  wc  would 
profitably  compare  public  with  private  prices,  that  the 
system  of  accounting  is  essentially  the  same  in  both. 
Unfortunately  this  is  seldom  the  case.  If  language  was 
invented,  as  the  cynic  said,  to  conceal  thought,  the  lan- 
guage of  municipal  book-keeping  is  certainly  eloquent. 
The  loss  which  occurs  to  the  city  by  foregoing  the  taxes 
which  would  be  paid  on  a  private  company's  plant  sel- 
dom troubles  the  municipal  accountant.  The  risk  in 
which  the  city  government  is  involved  by  the  possibility 
of  having  to  give  up  the  business  by  reason  of  failing 
therein  never  clouds  the  horizon  of  the  city  manage- 
ment.^ Still  allowance  for  interest  on  the  indebtedness 
incurred  in  building  the  city  plant  is  being  made  in  an  in- 
creasing number  of  public  reports.  Gratifying  as  this  con- 
cession is  to  sound  finance,  it  is  still  a  melancholy  reflec- 
tion that  the  allowance  made  in  municipal  accounts  for 
annual  repairs,  replacements,  and  contingencies  still  ex- 
cites either  the  wrath  or  the  derision  of  the  advocates  of 
the  franchise  system.  The  differences  in  two  systems  of 
accounting  are  sometimes  very  considerable.     For  ex- 

^This  is  not  a  purely  theoretical  risk.  Several  of  our  Ameri- 
can cities  have  been  compelled  after  a  public  trial  to  betake 
themselves  to  the  franchise  system.  A  private  company  will 
properly  take  the  element  of  risk  into  account.  Thus  a  private 
company  once  offered  to  light  Detroit  at  $124  per  lamp  per 
year  if  they  were  given  a  three  year  contract,  and  at  $102  per 
lamp  per  year  on  a  ten  year  contract. 


EVIDENCE  BEARING    UPON    THE    TIVO  POLICIES.     277 

ample,  the  Mayor  of  Philadelphia  recently  reported  to 
the  City  Council  an  annual  net  profit  on  the  city  gas- 
works of  $1,600,000.  A  committee  of  the  Massachusetts 
legislature  at  the  same  time  investigated  the  Philadel- 
phia plant  and  reported  back  that  the  city  was  losing  by 
it  $100,000  a  year.  Recent  developments  would  seem 
to  show  that  the  committee  was  much  nearer  the  truth 
than  the  Mayor. 

A  careful  sifting  of  the  evidence  presented  on  both 
sides  seems  to  establish  the  following  conclusions  as 
highly  probable:  (i)  The  price  charged  by  private  com- 
panies for  the  supply  of  water  exceeds  by  twenty-five  to 
forty-three  per  cent,  the  price  charged  by  municipal 
water-works  ^  ;  (2)  the  cost  of  the  water-supply  by  mu- 
nicipalities probably  exceeds  the  cost  incurred  by  pri- 
vate companies,  though  how  far  the  increased  cost 
augments  general  taxes  it  is  difficult  to  say;  (3)  while 
the  price  of  gas  in  England  under  both  systems  is  mark- 
edly less  than  the  price  of  gas  under  either  system  in  the 
United  States,^  the  rate  of  reduction  in  gas  prices  in  the 
United  States  since  1870  seems  to  have  been  more  rapid 
than  in  England  ^  ;  (4)  the  cost  of  producing  gas  has 
probably  been  less  under  private  than  under  public  man- 
agement. At  all  events  in  England  the  private  com- 
panies have  constructed  their  plants  on  the  average  at 
a  lower  cost,  have  produced  more  gas  from  the  average 
ton   of  coal   consumed,   and   have   delivered   a   slightly 


*  Cf.  Conkling,  City  Government  in  the  United  States,  pp. 
95  and  187:  Sinclair,  Municipal  IMonopolies  and  their  ManaRe- 
ment,  pp.  28,  29;  also  Baker,  Manual  of  American  Water  Works. 

^The  American  Gas  Light  Journal  for  Nov.  i,  1897,  gives  the 
average  per  capita  consumption  in  England  as  4245  cu.  ft.;  the 
average  per  capita  consumption  in  the  United  States  as  1770  cu.  ft. 

'Cf.  Municipal  Affairs  for  1897.  P-  28,^;  also  the  Reports  of 
the  Board  of  Gas  and  Electric  Light  Commissions  of  Massa- 
chusetts. 


278  MUNICIPAL  MONOPOLIES. 

larger  percentage  of  the  total  amount  of  gas  manufac- 
tured than  the  local  authorities  have  been  able  to  do. 
Still,  in  1889  the  expense  per  thousand  cubic  feet  manu- 
factured by  private  companies  in  England  was  slightly 
in  excess  of  the  expense  similarly  incurred  by  the  public 
companies  ^ — a  difference  which  conservative  account- 
ing may  possibly  explain.  It  is  practically  certain  that 
municipalities  have  paid  more  than  private  companies  for 
labor  both  in  England  and  in  the  United  States.  "  This 
failing,"  says  Professor  Bemis  naively,  "  if  it  be  a  failing, 
is  quite  common  in  public  works.  Many  consider  it  an 
advantage  for  public  works  thus  to  set  the  example  of 
good  wages."  ^  Our  complacency  on  this  score  might 
perhaps  be  just  if  the  example  set  by  our  public  works 
were  uniformly  an  example  of  good  wages  for  good 
work.  When,  as  is  so  common,  the  practice  of  our  pub- 
lic works  amounts  to  high  pay  for  the  inefficient  service 
of  party  hacks,  the  "  advantage  "  of  such  a  policy  is  more 
than  dubious ;  (5)  the  price  charged  for  gas  by  public 
companies  in  England  appears  to  be  less  by  seven  or 
eight  per  cent,  than  the  charge  made  by  private  com- 
panies, but  no  such  general  assertion  can  be  made  with 
respect  in  the  United  States ;  (6)  public  electric  light 
plants  in  this  country  cannot  be  said  generally  to  furnish 
electricity  at  a  lower  cost  or  price  than  private  com- 
panies. The  evidence  rather  tends  to  show  that  the  ad- 
vantage lies  with  private  companies,  especially  as  long 
rs  electrical  apparatus  is  evidently  in  the  transitional 
stage ;  (7)  local  transportation  has  been  undertaken  by 
several  British  municipalities  with  varying  success.  In 
this  country  it  is  as  yet  untried.    When  all  circumstances 


*  Cf.  Sinclair,  op.  cit.,  p.  30. 

'  Publications  of  the  American  Economic  Association,  1891, 
p.  78. 


B^IDENCE  BB/IRtNC   UPON   THE    TlvO  POLICIES.     279 

are  taken  into  consideration  it  would  appear  that  our 
transportation  service  is  not  only  immeasurably  more 
efficient  than  the  British  tramway  service,  but  that  the 
charges  for  distance  traversed  are  really  less  in  the 
United  States  than  upon  the  most  successful  of  munici- 
pal lines  in  Great  Britain.^ 

The  generalizations  which  may  be  drawn  from  this 
summary  are  that  cost  is  almost  certain  to  be  less  under 
a  private  company  than  under  city  management ;  that 
the  price  charged  the  consumer  may  be  less  under  muni- 
cipal public  works,  but  that  there  is  no  assurance  that 
this  zvill  he  the  case ;  that  efficiency  of  service  is  likely 
to  be  greater  under  a  private  system  where  improve- 
ments are  rapidly  introduced  than  under  a  public  system 
where  they  are  slowly  adopted.  When  to  these  tenta- 
tive conclusions  we  add  that  the  largest  experiment  in 
municipal  industries  in  the  United  States,  the  Philadel- 
phia gas-works,  after  an  experience  of  over  half  a  cen- 
tury has  proved  an  unquestioned  financial  failure,  the 
presumption  against  direct  municipal  service  in  this 
country  at  the  present  time  gathers  great  strength.  Po- 
litical conditions  being  what  they  are,  it  seems  fairly 
safe  to  assert  that  the  city  taxpayer  would  probably  be 
hit  harder  by  public  waste  and  public  stealing  than  by 
private  profits.  Obviously,  the  conclusion  drawn  is  fa- 
vorable to  the  franchise  system  rather  than  to  a  system 
of  municipal  industry. 

It  is  requisite  under  a  franchise  system  to  secure  to 
the  city  the  full  value  of  the  privileges  granted,  and  at 
the  same  time  so  to  shape  the  franchise  that  under  it 
the  service  afforded  shall  be  as  efficient  and  as  low- 
priced  as  possible.     This  task  is  one  of  detail  where  local 

*  Cf.  Municipal  Affairs,  1897,  p.  483. 


28o  MUNICIPAL  MONOPOLIES. 

conditions  may  often  properly  be  taken  into  account. 
Certain  general  principles  there  are,  however,  which 
ought  to  be  observed.  Evidently  the  longer  the  period 
for  which  the  franchise  is  granted,  the  less  will  be  the 
annual  charge  imposed  on  the  company  for  the  risk  it 
runs  of  finding  its  plant  an  elephant  on  its  hands.  In 
other  words,  the  assured  duration  of  the  franchise  acts  as 
a  sort  of  insurance  against  lack  of  employment  for  the 
capital  invested.  The  more  exclusive  are  the  privileges 
accorded  the  company  by  the  franchise,  the  less  will  be 
the  dread  of  the  competition  of  rivals.  Hence  this  in- 
surance against  future  competition  ought  still  farther  to 
lessen  the  company's  risks.  While,  therefore,  it  may  be 
unwise  public  policy  to  grant  perpetual  franchises,  "  all 
inclusive  and  exclusive,"  the  public  interest  is  undoubt- 
edly furthered  by  minimizing  the  risks  which  attend  the 
investment  of  private  capital  in  a  pul^lic  service  industry. 
There  is  much  to  commend  in  the  policy  of  selling  fran- 
chises at  auction  every  twenty-five  years  for  a  certain 
percentage  of  the  gross  receipts.  Theoretically,  a  certain 
percentage  of  the  net  profits  would  be  better  still,  as 
they  more  nearly  measure  the  annual  value  of  the  fran- 
chise. But  the  item  net  profits  can  be  juggled  with, 
whereas  the  item  gross  receipts  is  '  of  no  private  in- 
terpretation ' ;  and  this  is  a  case  where  clearness  and 
certainty  are  to  be  preferred  to  theoretical  equity.  There 
ma\-  be  some  force  in  the  contention  that  selling  fran- 
chises by  auction  increases  the  expenses  of  the  operating 
company,  and  thus  tends  to  keep  prices  high  or  service 
poor.  But  it  must  be  remembered  on  the  other  hand 
that  so  far  as  public  service  industries  are  analogous  to 
monopolies  the  tax  will  be  difficult  to  shift.  Moreover, 
if  the  franchise  is  absolutely  untaxed,  or  is  given  away 
instead  of  auctioned  off,  there  is  every  reason  to  beHeve 


FINANCIAL   CONCLUSIONS.  «8l 

that  the  prices  charged  will  be  set  with  exclusive  regard 
to  corporate  profits. ^ 

Financial  Conclusions. — The  real  issue  in  the  matter 
of  the  state's  quasi-economic  income  centres  in  the  pro- 
posal to  extend  the  state's  industrial  functions.  Such  a 
policy  is  advocated  not  merely  on  financial  grounds;  it  is 
urged  on  social  and  economic  grounds  as  well.  It  is 
a  problem  to  whose  solution  mere  watchwords  can  con- 
tribute nothing.  The  bugaboo  of  socialism  rouses  the 
fears  of  the  ordinary  citizen  as  little  as  the  shibboleth  of 
laissea  fairc  rouses  his  enthusiasm.  So  that  it  would  be 
nothing  surprising  if  the  experiment  of  the  municipal 
ownership  and  operation  of  industries  were  tried  in  the 
United  States  on  a  large  scale  within  the  next  two  dec- 
ades. 

It  is  indeed  not  impossible  that  a  policy  of  municipal 
industries  may  become  in  the  future  far  less  hazardous 
than  it  would  be  at  present.  There  may  be  a  more  per- 
vasive interest  in  our  city  politics.  The  extension  of  the 
competitive  civil  service  system  may  contribute  its  aid 
to  this  desirable  end.  Public  policy,  after  all,  is  relative 
to  conditions  of  time  and  place,  and,  provided  responsi- 
bility for  industrial  mismanagement  can  be  definitely  lo- 
cated, the  municipal  experiment  may  be  tried  under  fairly 
favorable  conditions.  Hardly  as  much  can  be  said  for 
the  possible  success  of  a  policy  of  federal  experimenta- 
tion. 

*  Where  a  street-car  company  or  a  gas  company  cannot  law- 
fully exceed  a  certain  price  for  the  service  afiforded,  a  tax 
imposed  on  the  franchise  may  be  partly  shifted  by  impairing 
the  quality  of  the  service  rendered  unless  this  be  prevented  by 
the  city.  Street  cars  may  be  crowded,  or  the  candle-power  ot 
gas  lessened.  This  possibility  serves  to  differentiate  the  cast 
from  the  abstract  case  of  a  tax  on  monopoly  profits.  The  im- 
plied assumption  there  was  that  the  quality  of  the  product  would 
remain  constant,  and  that  if  it  deteriorated  the  demand  at  the 
former  price  level  would  fall  off. 


282  MUNICIPAL   MONOPOLIES. 

In  any  case  it  is  fair  to  assume  that  only  where  the 
industry  is  an  actual  monopoly  is  the  state  warranted  in 
entering  the  industrial  lists.  Jevons  ^  lias  given  the 
characteristics  of  the  monopoly  whose  business  the  gov- 
ernment may  undertake  with  least  danger.  It  is  op- 
erated on  a  few  routine  principles,  as  is  the  post-office. 
It  supplies  a  permanent  and  widespread  want,  as  does 
the  water  supply.  Its  administration  is  under  the 
public  eye.  The  amount  of  capital  required  is  not 
excessive, — this  to  render  misleading  accounting  im- 
possible. Its  technical  apparatus  is  no  longer  in  the 
experimental  stage,  unlike  the  electric  apparatus  of  to- 
day. Professor  Hadley  acutely  criticises  this  summary 
by  saying  it  is  restrictive  rather  than  positive,  indicating 
where  the  risk  of  government  experiment  will  be  least 
rather  than  where  government  industry  will  be  abso- 
lutely superior  to  private  enterprise.  Still,  to  a  commu- 
nity bent  on  experimenting,  Jevons's  criteria  may  be 
helpful.  The  experiment  may  be  foohsh  or  ill-timed  or 
dangerous,  but  even  among  such  experiments  there  are 
some  less  hazardous  than  others. 

It  has  already  been  indicated  what  latitude  the  govern- 
ment has  in  setting  prices  upon  its  services.  The  private 
concern  knows  that  its  sales  must  in  the  long  run  cover 
its  expenses.  The  public  concern  knows  a  higher  law 
than  that  of  cost,  and  can  make  good  a  deficit  out  of  the 
proceeds  of  taxation.  Evidently,  the  government  may 
set  its  prices  below  cost,  at  cost,  or  (where  it  asserts  for 
itself  a   monopoly)   as  much  above  cost  as  it  pleases. 

*  Methods  of  Social  Reform,  p.  297.  Cf.  also  Hadley, 
Economics,  p.  397,  who  adds  another  desirable  criterion,  viz., 
that  the  industry  be  one  like  the  supply  of  gas,  of  whose  services 
the  city  government  largely  avails  itself.  This  will  secure  a  due 
regard  for  quality  and  cost  of  production  as  well  as  for  the  price 
to  the  private  consumer. 


FINANCIAL   CONCLUSIONS.  283 

Where  the  service  rendered  is  purely  or  dominantly 
political,  a  necessary  function,  such  as  the  protection 
of  life  or  property,  or  the  furnishing'  of  education 
in  the  public  schools,  the  question  of  price  does  not 
arise.  The  necessary  services  of  the  state  must  be  gra- 
tuitous and  must  be  paid  for  out  of  taxation. 

The  same  may  be  said  of  those  '  optional '  public  ser- 
vices which  are  warranted  by  public  utility  rather  thai 
by  absolute  political  necessity,  but  which  cannot  be  split 
up  and  imputed  with  any  definiteness  to  individuals. 
Such,  for  example,  is  the  maintenance  of  lighthouses 
by  the  federal  government,  or  the  lighting  of  the  streets 
by  a  city  government.  Expense  incurred  for  such  ser- 
vices must  be  met  by  general  taxation. 

Where,  on  the  other  hand,  the  service  rendered  is  in 
character  like  that  of  the  supply  of  gas  or  water,  where  the 
special  benefits  derived  by  individuals  are  measurable, 
numerically  comparable,  and  specifically  imputable,  the 
principle  of  cost  should  regulate  the  price  charged  by  the 
public  industry.  Cost,  of  course,  ought  to  cover  all 
charges,  fixed  as  well  as  current,  such  as  are  ordinarily 
allowed  for  in  a  similar  private  concern.  Cost  may  prop- 
erly cover  an  annual  amount  necessary  to  wipe  out  the 
principal  of  the  public  debt  incurred  on  account  of  the 
public  plant.  But  no  margin  for  clear  profit  ought  to 
enter  into  the  fixation  of  such  prices.  The  government 
has  no  interest  distinct  from  that  of  its  citizens  to  justify 
it  in  making  a  commercial  profit  from  the  services  it 
renders.  Nor  can  such  procedure  be  justified  on  the 
ground  that  the  profit  so  obtained  may  be  applied  to 
lessen  ordinary  taxes.  If  there  is  any  good  ground  for 
a  public  gas  plant,  for  example,  it  is  because  that  plant 
can  furnish  gas  at  a  lower  price  than  a  private  concern 
will.     If  the  public  plant  can  do  this,  it  ought  to  be 


284  MUNICIPAL   MONOPOLIES. 

willing  to  show  that  it  can  do  so  by  setting  prices  merely 
high  enough  to  cover  cost.  The  aggregate  of  taxation 
is  the  same  whether  a  larger  or  smaller  part  of  it  be  col- 
lected as  taxes  or  as  gas-bills ;  and  a  clear-cut  distinction 
between  what  the  citizen  pays  for  taxes  and  what  he 
pays  for  gas  will  prevent  any  hocus-pocus  by  which  he 
is  often  hopelessly  befuddled  as  to  what  he  pays  for 
either.  It  is  small  consolation  when  one  pays  a  high 
price  for  poor  municipal  gas  to  be  assured  that  he  is 
thereby  paying  part  of  his  taxes ;  especially  when  one 
afterwards  learns  that  in  reality  the  case  was  just  re- 
versed, and  that,  instead  of  his  gas-bill  covering  a  part 
of  his  taxes,  his  tax  bill  covered  a  part  of  the  cost  of  his 
gas. 


PART   III. 
TREASURY  MANAGEMENT. 

CHAPTER  I. 
GOVERNMENT   BORROWING,    OR   PUBLIC    CREDIT. 

The  War-chest  Policy. — Second  only  to  the  necessity 
of  furnishing  the  government  with  money,  is  the 
necessity  of  furnishing  this  money  within  the  period 
in  which  the  government  needs  it.  Roughly  speak- 
ing, the  ordinary  yield  of  taxes  about  suffices  to  pay 
for  the  ordinary  requirements  we  make  of  our  pub- ' 
lie  servants.  But  this  is  not  always  the  case.  Industrial  de- 
pression, for  example,  may  cause  the  revenues  temporarily 
to  shrink,  just  as  unusual  undertakings,  such  as  war,  may 
suddenly  multiply  expenses.  Either  event  will  put  the 
government  in  the  strait  of  not  having  sufficient  means 
to  meet  the  special  needs  that  have  arisen.  To  be  sure, 
the  opposite  situation  sometimes  confronts  us,  but  more 
rarely.  Redundant  revenue  may  result  from  booming 
trade,  or  from  the  re-establishment  of  peace.  But  the 
notorious  prodigality  of  governments  has  prevented  any 
very  prolonged  embarrassments  from  surpluses.  It  is 
the  deficit,  actual  or  threatened,  which  generally  occa- 
siotis  the  gravest  financial  concern. 

From  one  point  of  view  the  state  runs  into  debt  for 
much  the  same  reason  as  the  individual  does.     The  pri- 

285 


286  GOyERhlMENT  BORROlViNG,   OR  PUBLIC  CREDIT. 

vate  citizen  as  a  general  rule  must  earn  enough  each 
year  to  pay  his  year's  bills.  Still,  various  accidents,  such 
as  sickness  or  slack  trade,  may  plunge  him  into  debt. 
But  there  is  this  difference  between  the  state  and  the 
individual :  the  state  cannot  speedily  increase  its  in- 
come, as  the  individual  with  good  fortune  may  some- 
fimes  do.  The  mere  belating  necessity  for  legislative 
sanction  to  raise  more  money  or  to  spend  less,  as  well 
as  the  tardiness  of  most  new  tax  laws  to  yield  revenue, 
will  explain  this  difference  between  the  problems  which 
respectively  confront  the  public  financier  and  the  domes- 
tic economist.  Unless,  therefore,  the  government  keep  a 
store  or  horde  in  reserve  for  emergencies,  it  will  be  un- 
able at  a  pinch  to  get  the  money  it  requires,  unless  it 
can  borrow.  As  a  matter  of  fact  modern  governments 
do  borrow.  The  sovereign  doffs  his  gaudy  trim  of  sov- 
ereignty, and  with  hat  in  hand  enters  the  waiting-room 
of  the  private  capitalist  alongside  of  other  humbler  ap- 
plicants for  loans.  It  is  by  these  private  capitalists,  most 
of  them  the  subjects  of  the  state,  as  public  law  with 
unconscious  irony  calls  them,  that  the  credit  of  the  bor- 
rowing government  is  gauged  and  the  terms  upon  which 
it  can  obtain  loans  is  determined.  Credit,  whether  public 
or  private,  may  be  defined  as  the  power  to  obtain  capital 
by  a  promise  of  some  counter  service  or  payment  in  the 
future.  It  is  the  nature  of  the  state's  power  thus  to  ob- 
tain capital  that  we  are  to  discuss  in  this  place ;  but  be- 
fore entering  upon  that  subject  we  may  clear  the  way 
by  briefly  disposing  of  the  alternative  to  public  borrow- 
ing, that  is,  the  policy  of  keeping  a  reserve  or  a  "  war- 
chest,"  as  it  is  sometimes  called,  to  meet  a  sudden  fiscal 
emergency.  The  oljjections  to  this  policy  of  keeping  a 
reserve  fund  for  use  in  time  of  need  are  very  strong. 
(3  In  the  first  place,  the  extraordinary  expenses  occasioned 


THE   IV/tR-CHEST  POLICY.  287 

by  modern  wars  are  so  vast  that  no  nation  could  or 
would  submit  to  making  the  necessary  sacrifices  required 
to  collect  a  reserve  even  approximately  equal  to  meeting 
the  war's  probable  cost,  especially  if  an  enormous  con- 
tingent indemnity  to  the  victor  were  included  in  the  es- 
timate. To  advise  a  nation  to  avoid  a  war  debt  by  keep- 
ing a  war-chest  is  much  like  advising  an  individual  to 
avoid  penury  by  always  keeping  a  shilling  in  his  pocket. 
A  In  the  next  place  the  time  of  the  occurrence  of  extraor- 
dinary need  cannot  be  calculated.  The  maintenance  of 
a  huge  reserve  entails  a  certain  and  present  sacrifice  to 
meet  an  uncertain  and  remote  danger.  If  the  reserve 
be  kept  in  the  form  of  coin,  the  buried  treasure  subtracts 
just  so  much  from  the  nation's  circulating  medium.  The 
Germans  alone  of  modern  people  pursue  this  policy. 
They  have  not  yet  learned  the  Horatian  warning: 

Nullus  argento  color  est  avaris 
Abdito  ierris  .    .    . 

If  the  war  reserve  be  in  the  form  of  securities,  the  state 
runs  the  risk  of  their  depreciation  and  the  danger  of 
having  to  unload  them  on  a  falling  market  in  case  of 
need.  Besides,  if  the  interest  on  such  securities  is  used 
to  meet  every-day  expenses,  the  sale  of  the  securities  will 
necessitate  a  new  provision  for  the  wants  which  the  van- 
ished income  of  the  securities  no  longer  provides  for. 
The  danger  which  some  insist  inheres  in  the  war  reserve 
policy  of  afifording  the  government  the  power  of  initia- 
tive in  hastily  precipitating  a  struggle  has  probably  been 
exaggerated,  for  modern  wars  are  most  frequently  forced 
by  the  people  upon  a  reluctant  government.  Indeed 
about  the  only  intelligent  defence  that  can  be  made  of 
the  war  reserve  policy  under  modern  conditions  is,  not 
that  it  obviates  a  war  debt,  but  that  it  renders  easy  the 


288  GOVERNMENT  BORROWING,    OR   PUBLIC  CREDIT. 

transition  to  a  state  of  liostilities  by  putting  at  the  ready 
disposal  of  the  government  the  sinews  of  war  for  the 
beginning  of  a  conflict.  In  general,  then,  the  policy  of 
the  war-chest  may  be  pronounced  unwise  and  ineffectual. 
These  reserves  are  not  large  enough  to  begin  to  cover  the 
cost  of  war ;  they  do  not  obviate  a  war  debt ;  they  in- 
volve a  certain  loss  without  affording  any  guarantee  of 
adequate  protection  when  the  uncertain  hour  of  need 
has  struck.  Moreover,  their  infrequent  occurrence  at 
the  present  time  warrants  us  in  passing  over  them 
lightly,  and  in  taking  up  the  unattractive  but  inevitable 
alternative  of  public  borrowing  and  public  debts. 

Peculiarities  of  Government  Borrowing. — Ever  since 
Adam  Smith  writers  in  describing  the  peculiarities  of 
public  as  contrasted  with  private  borrowing  have  insisted 
upon  certain  pre-conditions  which  must  exist  before 
states  can  borrow  money.  These  pre-conditions  appear 
to  be  two  in  number.  >^  First,  there  must  exist  a  money- 
market  where  capital  is  to  be  had  in  exchange  for  a 
pledge  of  future  counter  service  or  repayment.  The 
obvious  necessity  of  a  money-market  might  go  without 
mention  were  it  not  wise  to  insist  that  the  money-market 
in  its  modern  form  is  historically  coeval  with  the  ap- 
pearance and  political  power  of  the  commercial  classes, 
and  dates  back  only  two  centuries  in  modern  Europe. 
The  other  necessary  prerequisite  according  to  most 
financial  writers  is  political  in  its  nature  rather  than  eco- 
nomic, and  consists  in  some  adequate  security  to  assure 
the  lender  of  the  fulfilment  by  the  state  of  the  promises 
it  makes  when  the  loan  is  contracted.  This  security  is 
thought  to  consist  substantially  in  the  power  and  influ- 
ence exerted  by  the  propertied  classes  upon  legislatures 
to  prevent  them  from  repudiating  public  obligations. 
The  public  creditor,  Professor  Adams  contends,  prac- 


PECULIARITIES  OF  GOVERNMENT  BORROIVING.     289 

tically  lends  to  a  corporation  (the  government)  con- 
trolled by  himself,  or  by  the  class  he  belongs  to.  The 
germ  of  this  idea  of  "  commercial  constitutionalism  "  ap- 
pears in  the  "  Wealth  of  Nations."  ^  "  The  same  com- 
mercial state  of  society,"  says  Adam  Smith,  "  which,  by 
the  operation  of  moral  causes,  brings  government  in  this 
manner  into  the  necessity  of  borrowing,  produces  in  the 
subjects  both  an  ability  and  an  inclination  to  lend.  If 
it  commonly  brings  along  with  it  the  necessity  of  bor- 
rowing, it  likewise  brings  along  with  it  the  facility  of 
doing  so."  While  a  money-market  and  some  political 
security  against  repudiation  must  unquestionably  under- 
lie government  borrowing,  it  seems  likely,  as  Bastable  2 
remarks,  that  the  "  mere  existence  of  constitutional  rule 
does  not  suffice  to  create  borrowing,  nor  its  absence  to 
stop  it,  as  the  French  debt  of  the  eighteenth  century 
and  that  of  Russia  at  present  will  suffice  to  prove."  The 
hostility  of  late  years  manifested  in  the  United  States 
against  the  increase  of  the  federal  bonded  indebtedness 
except  for  war  purposes,  and  our  general  acquiescence 
in  the  wisdom  of  expunging  public  debts  in  time  of 
peace,  seem  both  of  them  to  qualify  the  conclusions 
drawn  of  the  inevitable  connection  between  constitu- 
tional rule  and  public  debts.^     The  essential  peculiarities 

^Vol.  II.,  Bk.  v.,  p.  509  (Thorold  Rogers'  edition). 

*  Public  Finance,  p.  579. 

*  The  most  illuminating  depiction  of  the  evolution  of  state 
borrowing  appears  in  Cohn's  National  Oekonomie  (Vol.  II.,  p. 
707  sq.).  He  points  out  how  (i)  the  security  afforded  by  the 
borrowing  state  has  changed  from  an  objective  material  pledge, 
such  as  territory,  to  the  general  reputation  modem  states  have 
acquired  for  financial  trustworthiness;  (2)  how  formerly  states 
could  borrow  only  for  short  time  periods,  whereas  now  they 
can  borrow  in  perpetuity,  if  necessary;  (3)  how  the  occasion 
for  borrowing  is  no  longer  a  simple  lack  of  resources,  but 
unusual  expenses  especially  for  public  industries  which  in  time 
will  be  defrayed  by  public  industrial  earnings  and  by  normal 
revenue;  (4)  how  forced  loans  are  being  replaced  by  voluntary 


«90  GOyERNMENl    BORROPVING,   OR  PUBLIC  CREDIT. 

of  State  borrowing-  as  compared  with  borrowing  by  indi- 
viduals are  but  two  in  number :  ,fijcst,  the  unique  legal 
status  of  the  state  which  borrows ;  and  second,  the  unique 
effect  produced  by  the  state's  fulfilment  of  its  financial 
obligations  to  its  creditors.  It  will  hardly  do,  as  Bas- 
table  would  have  us  believe,  to  elevate  into  this  cate- 
gory of  salient  characteristics  of  public  borrowing  the 
difficulty  states  find  in  avoiding  debt.  Many  private  in- 
dividuals, if  we  are  to  judge  by  their  conduct,  experience 
a  similar  difficulty.  Nor  does  any  generic  difference 
arise  from  the  fact  that  the  state  is,  as  Leroy-Beaulieu 
puts  it,  an  ctrc  impcrissablc.  States  are  mortal  no  less 
than  men,  and  private  corporations  are  often  longer  lived 
than  governments. 

First,  then,  the  borrowing  state  is  unlike  an  ordinary 
debtor  in  that  the  state  is  sovereign,  and  cannot  against 
its  will  be  forced  to  observe  its  bargain  with  its  creditor. 
It  may  repudiate  without  having  to  abscond  ;  it  may 
default  and  not  fail.  Our  commonwealth  governments 
cannot  be  forced  against  their  will  to  observe  their  finan- 
cial obligations.  Some  of  them  have  repudiated  their 
debts  more  than  once.  The  minor  units  of  government, 
however,  such  as  incorporated  cities,  can  generally  be 
cited  into  court  by  private  persons  and  made  to  fulfil 
their  contracts.  This  peculiar  legal  status  of  govern- 
ments loses  much  of  its  importance  from  the  fact  that 
vvhile  no  legal  remedies  may  be  at  the  command  of  the 
public  creditor,  there  is  an  economic  sanction  which  the 
legal  sovereign  cannot  escape.  This  sanction  is  the  ac- 
tual or  anticipated  refusal  of  the  private  capitalist  to  lend 

loans;  (5)  how  adventitious  inducements  such  as  lotteries  are  no 
longer  necessary  to  cajole  capitalists  into  proffering  their  capital 
to  the  state;  and  (6)  how  special  organs  of  haute  finance,  such 
as  the  Rothschilds'  houses,  have  been  evolved  to  take  and  plac? 
the  securities  a  state  issues  when  it  contracts  a  loan. 


PECULIARITIES  OF  GOl^ERNMENT  BORRO(VING.     291 

again  to  a  defaulting  government,  or,  if  at  all,  only  at 
such  rates  of  interest  as  will  insure  him  against  any  haz- 
ard of  future  bad  faith  on  the  part  of  the  state.  Indeed 
it  seems  that  the  legal  sovereignty  of  debtor  states,  so 
long  as  it  has  mirrored  any  part  of  their  actual  power  to 
repudiate,  has  warranted  and  compelled  private  capital- 
ists to  charge  higher  rates  of  interest  on  public  loans 
than  otherwise  would  have  been  exacted.  It  is  only 
when  the  power  to  repudiate  has  been  renounced,  to  all 
intents  and  purposes,  that  a  state  can  borrow  on  the 
most  advantageous  terms.  The  real  significance  of  sov- 
ereignty from  a  financial  standpoint  is  mostly  historical, 
and  consists  in  the  record  of  how  governments  have 
learned  by  experience  that  honesty  is  the  best  policy. 
So  far  as  sovereignty  is  operative  in  the  actual  world  of 
finance,  it  is  mainly  as  an  element  of  risk  which  the 
capitalist  may  think  it  worth  his  while  to  consider  in 
offering  to  loan  capital  to  a  semi-civilized  or  a  semi- 
honest  government. 

The  second  unique  factor  about  public  borrowing  is 
the  effect  produced  by  the  state's  fulfilment  of  its  obli- 
gations to  its  creditors.  When  a  loan  is  contracted  be- 
tween two  private  parties  the  payment  of  interest  is  made 
for  the  use  of  borrowed  capital.  The  use  of  such  bor- 
rowed capital  generally  results  in  gain  to  the  borrower 
as  well  as  to  the  lender.  The  capital  is  invested  ordi- 
narily in  some  business  enterprise  and  is  the  ground  of 
the  profits  out  of  which  the  interest  is  paid.  Where  this 
is  not  the  case  the  payment  of  interest  must  eventually 
cease.  Normally,  therefore,  the  payment  of  interest  by 
one  individual  to  another  connotes  a  mutual  benefit,  as 
well  as  an  industrial  service  to  society  at  large.  The 
payment  of  interest  by  the  state  to  its  bond-holders  often, 
though  not  always,  connotes,  not  a  public  benefit,  but  a 


292     GOVERNMENT  BORROIVING,   OR  PUBLIC  CREDIT. 

public  sacrifice.  The  state  may  be  payin|Tf  its  creditors 
interest  upon  a  loan  of  capital  where  the  actual  capital 
borrowed  was  destroyed  years  ago  in  prosecuting  a  war, 
or  wasted  outright  in  some  industrial  venture.  Such  in- 
terest payments  are  made  (except  where  there  may  be 
productive  public  property,  such  as  railroads  operated  at 
a  profit)  by  taxing  the  state's  citizens.  The  bond-holder's 
income  in  such  cases  is  simply  taken  from  the  taxpayers' 
pockets.  Sometimes,  it  is  true,  the  results  of  a  war  have 
been  so  beneficial  to  a  nation  that  the  interest  paid  to 
those  who  furnished  the  capital  for  the  war  is  more  than 
made  up  for  by  the  advantages  the  taxpayers  at  present 
enjoy.  But  war,  unlike  industry,  is  a  game  at  which 
only  one  party  can  win,  and  at  which,  if  we  consider 
everything,  both  parties  not  infrequently  lose.  So  that 
in  general  the  statement  must  stand  that  the  payment  of 
interest  or  the  repayment  of  the  principal  to  the  public 
creditor  implies  a  synchronous  sacrifice  on  the  i)art  of 
the  taxpayer  instead  of  a  mutual  benefit,  as  in  the  case 
of  ordinary  industrial  loans.  This  must  not  be  taken, 
of  course,  as  any  justification  for  repudiation,  but  simply 
as  a  colorless  picture  of  the  actual  operation  of  public 
debts.  The  evils  inherent  in  the  system  would  be  en- 
hanced, not  abated,  by  a  policy  of  repudiation.  The  pay- 
ment of  interest  to  the  public  creditor,  however,  differs 
from  the  analogous  transaction  between  private  persons 
in  this  also,  that,  barring  any  attempt  at  repudiation  and 
assuming  a  strong  government,  interest  on  the  public 
debt  is  much  more  certain  to  be  paid  than  on  a  private 
loan.  The  ability  of  a  railroad  to  pay  dividends  on  its 
stock  will  depend  on  that  particular  railroad's  earnings. 
If  these  shrink,  the  dividends  will  be  passed.  Not  so 
with  the  interest  on  the  public  debt.  Depending  as  it 
does  on  the  proceeds  of  taxation,  the  bond-holder  is  as- 


PECULIARITIES  OF  GOVERNMENT  BORROWING.     293 

sured  of  his  income  so  long  as  the  tax-gatherer  is  sure 
of  his  harvest.  This  is  one  reason  for  the  low  rate  at 
which  governments  often  borrow,  that  the  security  they 
offer  is  largely  independent  of  the  state  of  any  particular 
industry,  and  depends  on  industry  in  general.  The 
broad  base  upon  which  the  borrowing  power  of  the  state 
rests  is  without  question  the  most  significant  feature  of 
public  credit.  Public  debts  are  thus  in  essence  a  lien 
upon  the  income  of  the  taxpayers. 

Since  the  interest  payments  made  by  the  state,  as  well 
as  the  repayment  of  the  principal  of  public  debts,  must 
eventually  fall  upon  the  taxpayers,  the  question  may 
naturally  arise, — why  not  resort  to  taxes  at  the  very  out- 
set, instead  of  borrowing  first  and  taxing  afterwards  ? 
Some  such  suggestion  is  not  infrequently  made,  espe- 
cially at  the  beginning  of  a  war,  when  the  subject  of  ways 
and  means  comes  up  for  discussion.  If  it  were  possible 
to  obtain  the  requisite  amount  of  capital  by  suddenly 
increasing  taxes,  and  if  such  an  unexpected  increase  of 
taxes  could  be  borne  by  the  community  without  serious 
protest,  there  might  be  much  to  say  in  favor  of  a  policy 
of  taxation  and  against  a  policy  of  loans.  Unfortunately 
the  yield  of  new  taxes  is  uncertain  and  often  tardy,  and 
popular  repugnance  to  a  sudden  violent  increase  of  taxa- 
tion makes  necessary  the  use  of  both  loans  and  higher 
taxes  to  meet  such  fiscal  emergencies  as  war.^  If,  how- 
ever, the  plan  of  defraying  all  war  expenses  by  taxation 
is  extreme  in  its  severity  and  practically  impossible,  the 
opposite  policy  of  attempting  to  raise  all  supplies  by 
borrowing  is  as  dangerous  as  it  is  alluring.     This  exclu- 

*  There  is  also  some  truth  in  the  statement  that  if  the  entire 
cost  of  war  were  borne  during  the  war  by  taxes,  certain  income 
recipients  who  profit  by  the  war  would  be  absolved  in  future 
from  paying  any  part  of  the  cost  of  the  conflict  whose  benefit 
they  share. 


294  GOVERNMENT  BORROIVING,   OR   PUBLIC  CREDIT. 

sive  reliance  on  loans  was  tried  by  us  in  the  revolutionary 
war,  with  the  result  that  the  general  government  went 
bankrupt.  It  was  essayed  in  the  beginning  of  the  war 
of  1812,  and  to  a  certain  extent  in  the  civil  war,^  and 
again  in  both  instances  the  credit  of  the  government 
fell,  its  obligations  were  sold  at  a  discount,  and  the  debt 
incurred  was  vastly  in  excess  of  what  was  actually  neces- 
sary. Sane  financial  policy  in  time  of  war  requires  that 
capital  be  obtained  at  the  outset  by  borrowing,  and  that 
additional  taxes  be  at  once  imposed  to  meet  the  addi- 
tional interest  charge  thereafter  to  be  borne  by  the  gov- 
ernment on  account  of  the  increased  debt.  Sound  policy 
also  requires  that  at  least  a  part  of  the  extra  capital 
needed  be  raised  by  taxing  the  present  age  instead  of 
unduly  burdening  future  generations.  The  reason  why 
a  reliance  wholly  upon  loans  fails  as  a  financial  resource 
in  time  of  war  is  this:  Buyers  of  government  bonds 
want  to  be  assured  of  an  annual  income  regularly  paid. 
This  income  the  state  can  secure  with  certainty  for  its 
creditors — the  bond-holders — only  through  the  agency  of 
taxation.  If  instead  of  resorting  to  taxes  the  state  trusts 
to  future  loans  out  of  which  to  pay  the  interest  guaran- 
teed on  the  loans  already  made,  future  buyers  of  bonds 
will  be  chary  of  an  investment  whose  yield  is  so  uncer- 
tain. Either  they  will  not  buy  bonds  at  all,  or  only  at 
a  discount,  or  they  will  exact  exorbitant  rates  of  interest. 
On  the  other  hand,  the  policy  of  attempting  to  meet  all 
the  extraordinary  expenses  of  war  by  means  of  current 
taxation  has  never  been  successful  on  any  great  scale. 
Even  in  England,  where  the  willingness  and  ability  to 
follow  such  a  plan  have  been  greater  than  elsewhere, 
two  thirds  of  the  costs  of  her  wars  since  1688  have  been 


'Cf.  H.  C.  Adams.  Public  Finance,  p.  ISS-^^- 


EFFECT  OF  CONCERNMENT  BORROIVING.  295 

provided  for  by  borrowing,  and  but  one  third  by  en- 
hanced taxes.* 

Effect  of  Government  Borrowing. — Ever  since  states 
began  to  pile  up  public  debts  the  policy  of  resorting 
to  public  credit  has  been  discussed  by  publicists  and 
economists  with  singularly  little  unanimity  of  opinion. 
Head-shakings  have  characterized  the  wise  and  prudent 
who  prophesied  certain  disaster  from  the  loan  policy, 
while  others,  regarding  mainly  the  concomitant  growt'i 
of  national  industry,  have  boldly  declared  that  public 
debts  were  as  desirable  as  gold  mines,  and  that  a  national 
debt  was  a  national  blessing.  More  judicious  observers 
have  attempted  to  steer  a  middle  course,  and  have  drawn 
up  lists  of  objects  for  whose  attainment  the  creation  of 
public  debt  is  justifiable.^  Such  lists,  however,  go  a  very 
little  way  in  solving  the  riddle.  Indeed,  it  is  doubtful 
whether  any  formula  can  prove  in  this  matter  of  much 
real  assistance.  When  it  is  remembered  that  the  pay- 
ments made  to  the  public  creditor  come  from  current 
taxation,  the  common  sense  test  of  state  borrowing  will 
consist  in  weighing  well  the  benefits  accrued  and  accru- 
ing from  the  proceeds  of  any  concrete  loan,  with  the 
sacrifices  (taxes)  which  the  loan  in  question  has  caused. 
Such  benefits  are  often  very  imperfectly  measurable  in 
money  terms.  Indeed,  there  is  but  one  generic  case 
where  the  advantage  of  public  borrowing  can  be  proved 
in  black  and  white.  Where  the  loan  has  been  made  to 
construct  public  works  of  general  utility,  water-works 
for  example,  for  whose  services  charges  are  imposed, 
and  where  the  plant  has  proved  to  be  financially  success- 
ful as  well  as  mechanically  efficient,  the  success  of  the 

^  Leroy-Beaulieu,  Science  des  Finances,  II.,  p.  258  sq. 

'  H.  C.  Adams,  Public  Debts,  p.  78.  mentions  temporary 
deficits,  war,  and  public  works,  as  justifying  a  resort  to  the  loan 
policy. 


ig^  GoyBRNMEhiT  borroiving,  or  public  credit. 

loan  can  hardly  be  questioned.  On  the  other  hand, 
where  the  government  borrows  to  construct  or  acquire 
property  whose  usufruct  is  enjoyed  without  any  specific 
charge  to  the  citizens,  the  wisdom  of  the  loan  policy  must 
be  gauged  by  the  estimate  we  place  upon  the  advantages 
obtained  from  the  property  in  question.  Money  esti- 
mates fail  almost  altogether  when  we  try  to  judge  of 
the  wisdom  of  a  policy  of  selling  bonds  to  acquire  parks, 
improve  highways,  or  build  iron-clads.  So  long  as  men 
differ  in  opinion  upon  questions  of  public  policy,  so  long 
will  they  diflfer  upon  the  utility  of  specific  public  loans. 
Where  the  result  of  public  borrowing  is  not  only  not 
measured  in  dollars  and  cents,  but  where  the  result  of 
such  borrowing  is  partly  or  wholly  intangible  and  im- 
material, the  difficulty  of  pronouncing  an  enlightened 
judgment  is  immensely  enhanced.  Take  for  example 
the  case  of  public  borrowing  for  educational  purposes, 
such  as  the  building  of  high  schools  or  their  equipment. 
Can  we  be  absolutely  certain  that  the  education  imparted 
will  result  in  such  mental  training  as  to  compensate 
wholly  for  the  sacrifices  entailed  by  the  heavy  taxes  paid 
on  the  school  bonds  ?  If  the  plant  and  equipment  have  been 
bought  at  a  fair  price,  and  are  not  disproportionate  to 
the  needs  of  the  community,  there  are  perhaps  few  who 
would  dispute  the  wisdom  of  the  loan.  But,  to  take  an- 
other case,  where  recourse  to  public  credit  has  been 
necessary  to  preserve  the  national  life  or  honor,  there 
are  few  rash  enough  to  lament  the  cost  of  the  loan  policy. 
There  are  times  when  neither  the  state  nor  the  individual 
can  stop  to  count  the  cost.  But  we  are  much  too  prone 
to  assume  that  war  loans  have  been  necessitated  by  such 
lofty  and  ideal  motives.  There  is  more  than  a  grain  of 
truth  in  Ruskin's  bitterly  ironical  depiction  of  a  public 
debt.     A  civilized  nation, says  Ruskin  in  Fors,  "in  modern 


EFFECT  OF  GOVERNMENT  BORROIVING.  297 

Europe  consists  essentially  of  (a)  a  mass  of  half-taught, 
discontented,  and  mostly  penniless  populace  calling  itself 
the  people ;  of  (b)  a  thing  which  calls  itself  a  government 
— meaning  an  apparatus  for  collecting  and  spending 
money ;  and  {c)  a  small  number  of  capitalists,  many  of 
them  rogues  and  most  of  them  stupid  persons,  who  have 
no  idea  of  any  object  of  human  existence  other  than 
money-making,  gambling,  or  champagne-bibbing.  A 
certain  quantity  of  literary  men,  saying  anything  they 
can  get  paid  to  say, — of  clergymen  saying  anything  they 
have  been  taught  to  say, — of  natural  philosophers  saying 
anything  that  comes  into  their  heads, — and  of  nobility 
saying  nothing  at  all,  combine  in  disguising  the  action, 
and  perfecting  the  disorganization,  of  the  mass ;  but  with 
respect  to  practical  business  the  civilized  nation  con- 
sists broadly  of  mob,  money-collecting  machine,  and 
capitalist. 

"  Now  when  this  civilized  mob  wants  to  spend  money 
for  any  profitless  or  mischievous  purposes — fireworks, 
illuminations,  battles,  driving  about  from  place  to  place, 
or  what  not, — being  itself  penniless,  it  sets  its  money- 
collecting  machine  to  borrow  the  sum  needful  for  these 
amusements  from  the  civilized  capitalist. 

"  The  civilized  capitalist  lends  the  money  on  condition 
that,  through  the  money-collecting  machine,  he  may  tax 
the  civilized  mob  thenceforward  forever.  The  civilized 
mob  spends  the  money  forthwith  in  gunpowder,  infernal 
machines,  masquerade  dresses,  new  boulevards,  or  any- 
thing else  it  has  set  its  idiotic  mind  on  for  the  moment; 
and  appoints  its  money-collecting  machine  to  collect  a 
daily  tax  from  its  children,  and  children's  children,  to  be 
paid  to  the  capitalists  from  whom  it  had  received  th< 
accommodation  thenceforward  forever. 

"  That  is  the  nature  of  a  National  Debt." 


29^   GOVERNMENT  BORROlVING,   OR  PUBLIC  CREDIT. 

The  primary  effect  of  public  debts  is  heavier  taxes, 
but  there  are  certain  collateral  effects  of  public  borrow- 
ing that  cannot  be  dismissed  without  a  word  of  comment. 
First  in  order  comes  the  effect  of  public  borrowing  upon 
industry  in  general.  When  the  state  enters  the  money- 
market  it  bids  for  the  control  of  some  of  the  capital 
which  hitherto  has  been  offered  by  private  capitalists  to 
each  other.  The  state's  control  of  a  part  of  the  loan 
fund  lessens  the  amount  available  for  use  in  private  in- 
dustry, and  will  often  result  in  driving  up  the  rate  of 
interest.  The  more  capital  the  state  absorbs,  the  less 
will  there  be  left  ordinarily  for  private  persons  to 
control  and  use,  unless  foreigners  come  forward  and 
throw  their  capital  upon  the  market.  In  case  the  gov- 
ernment uses  its  loans  exclusively  for  some  purely  com- 
mercial or  industrial  purpose,  such  as  the  acquisition, 
construction,  or  operation  of  railroads,  and  in  case  it 
successfully  manages  the  industry  in  question,  the  effect 
upon  the  real  income  of  the  people  will  not  be  great. 
What  private  enterprise  has  hitherto  done  the  state  now 
manages  successfully ;  and,  barring  the  difficulty  of  the 
transition  from  private  to  public  ownership,  the  result 
has  not  been  of  great  moment.  The  rate  of  interest  may 
not  be  permanently  affected,  as  the  capital  thereafter 
controlled  by  private  concerns  may  suffice  for  the  nar- 
rowed industrial  field  to  which  they  have  been  restricted. 
When,  however,  we  remember  that  the  government  bor- 
rows as  frequently  for  war  or  armament  as  for  indus- 
trial ventures,  and  is  so  unlikely  to  succeed  in  the  latter, 
the  conclusion  is  inevitable  that  government  borrowing 
is  likely  to  raise  the  rate  of  interest.  The  supply  of  con- 
sumable commodities  is  likely  to  be  reduced  on  account 
of  the  smaller  amount  of  capital  employed  in  their  pro- 
duction, and  the  price  level  is  likely  to  rise  in  the  long 


EFFECT  OF  GOVERNMENT  BORROWING.  299 

run  for  the  same  reason.  Some  compensating  effects 
arise  from  the  greater  energy  exerted  under  the  stimulus 
of  necessity,  and  the  more  efficient  utihzation  of  what 
capital  remains  available  for  private  industry,  but  the 
real  incomes  of  all  classes  except  the  capitalists  and  the 
speculators  are  likely  to  fall  because  of  the  curtailed  sup- 
ply of  necessities  and  comforts.  One  cannot  eat  his 
cake  and  have  it  too ;  and  if  a  nation  increases  its  force 
of  soldiers  and  sailors,  it  must  decrease  the  number  of 
its  farmers  and  mechanics ;  if  it  spends  more  on  gun- 
powder and  guns,  it  must  spend  less  on  bread  and  butter. 
There  will  be  numerous  exceptions  to  this  general  rule. 
Army  contractors  will  obviously  wax  fat.  The  time  of 
war  may  coincide  with  a  period  of  industrial  revival. 
Work  may  be  plenty;  discontent  may  be  hushed.  But 
until  there  is  a  safe  way  found  to  get  something  for  noth- 
ing, we  may  rest  surely  in  the  conviction  that  much  of 
the  apparent  prosperity  has  no  real  or  lasting  foundation, 
that  the  rise  in  prices,  especially  if  irredeemable  paper 
money  has  been  emitted,  is  purely  nominal,  and  that 
our  fool's  paradise  will  prove  eventually  a  house  of  cards. 
Besides  the  industrial  effects  of  a  public  loan  policy 
there  are  certain  political  and  social  influences  springing 
from  the  same  source.  Obviously,  a  man  must  have 
capital — must  even  be  a  capitalist  on  a  small  scale — be- 
fore he  can  lend  money  to  the  government,  so  that  public 
borrowing  cannot  be  charged  with  creating  a  distinct 
class  in  the  community  whose  interests  are  not  at  one 
with  those  of  society.  But  the  assured  income  from 
such  loans  to  the  public,  it  is  maintained,  absolves  the 
public  creditor  from  the  necessity  or  inclination  thereafter 
of  working  for  his  living,  and  keeping  in  healthy  touch 
with  his  industrial  environment.  So,  too,  it  is  asserted 
that  the  payment  of  the  bond-holder  and  the  extinction 


300  GOVERNMENT  BORROIVING.   OR  PUBLIC  CREDIT. 

of  the  public  debt  will  convert  this  formerly  torpid  class 
into  active  men  of  business  and  imbue  them  with  a  solici- 
tous concern  for  investing  in  some  kind  of  productive 
industry  the  capital  which  the  state  has  returned  to  them. 

"  The  bond,  a  beggar  now, 
Seeks   investment  anyhow, 
Anywhere." 

It  is  hardly  likely  that  this  is  altogether  the  case.  Sup- 
pose that  a  definite  amount  of  the  nation's  property  were 
turned  over  to  the  bondholders  in  full  satisfaction  of  their 
claims  upon  the  state.  In  so  far  as  this  property  is  in 
the  shape  of  lands  and  houses,  the  public  creditors  might 
use,  occupy,  or  let  them ;  in  so  far  as  the  property  trans- 
ferred is  in  the  shape  of  industrial  capital,  it  seems  not 
unlikely  that  the  entrepreneurs  (if  we  may  assume  for 
a  minute  that  they  are  totally  distinct  from  the  bond- 
holding  class)  would  still  control  this  capital,  and  pay 
interest  for  its  use  to  its  owners,  the  ex-bond-holders, 
rather  than  as  formerly  to  the  state  as  an  intermediary 
agent  collecting  the  bond-holders'  interest  under  the 
guise  of  taxes.  Indeed  the  influence  of  public  borrow- 
ing in  creating  a  class  of  capitalists  is  nil ;  its  influence 
in  perpetuating  such  a  class  is  not  very  much  greater. 
Much  stress  is  laid  by  some  writers  on  the  stimulus  given 
to  saving  by  affording  the  opportunity  to  invest  in  pub- 
lic securities.  But  here  again  we  may  doubt  the  extent 
of  such  an  influence.  It  is  not  very  likely  that  a  man 
who  will  not  save  to  invest  in  a  savings-bank  which  he 
has  seen  will  save  to  lend  to  a  government  which  he  hqs 
not  seen. 

Lastly,  there  is  a  political  influence  exerted  by  the  loan 
policy,  though  publicists  are  hardly  agreed  on  the  exact 
nature  of  this  influence.    Professor  H,  C.  Adams  ^  thinks 

*  Public  Debts,  pp.  22,  23. 


THE    TECHNIQUE  OF  PUBLIC  BORROIVING.         3^1 

that  government  borrowing  tends  to  weaken  public  con- 
trol over  the  purse  by  allowing  legislatures  to  embark 
on  ventures  whose  cost  would  prove  a  deterrent  if  the 
cost  had  to  be  met  by  the  immediate  imposition  of  taxes, 
and  argues  that  any  method  of  procedure  "  which  allows 
the  government  to  enter  upon  any  great  enterprise  with- 
out bringing  the  fact  fairly  to  the  knowledge  of  the  pub- 
lic must  work  against  the  realization  of  the  constitutional 
idea."  Before  the  imposition  of  constitutional  checks 
upon  the  powers  of  state  legislatures  to  borrow  on  the 
public  credit,  there  was  much  to  be  said  for  this  aspect 
of  the  case.  But  the  danger  that  the  public  credit  will 
be  employed  surreptitiously  in  future  is  a  vanishing 
danger  in  the  United  States.  The  state  legislatures  for- 
tunately are  hampered  now  by  constitutional  amend- 
ments from  taking  such  a  course ;  and  the  public  keeps 
a  sharp  lookout  on  any  proposal  by  Congress  to  author- 
ize the  issue  of  bonds.  Indeed  it  is  far  more  likely  that 
the  chief  political  effect  produced  by  federal  borrowing 
is  to  attach  more  firmly  to  the  federal  government  the 
interests  of  the  public  creditors  who,  it  is  to  be  feared, 
may  exert  in  time  an  influence  on  that  body  to  prolong 
the  public  debt  beyond  the  limit  dictated  by  general  ex- 
pediency.^ 

The  Teclinique  of  Public  Borrowing.  —  An  intelligent 
apprehension  of  the  subject  of  public  credit  involves,  in 
addition  to  an  understanding  of  the  peculiar  nature  and 
effects  of  government  loans,  some  knowledge  of  the  tech- 
nical handling  of  public  debts.  This  will  embrace  a 
description  of  the  various  forms  or  classes  of  public 
debts ;  of  the  way  in  which  they  are  negotiated  or  sold ; 

^  Leroy-Beaulieu,  Science  des  Finances,  Vol.  II.,  p.  309, 
speaks  of  "  I'habitude  en  France  si  inveteree  de  sacrifier  les  con- 
tribuables  aux  rentiers." 


30  2    GOyERNMENT  BORROlVlNC.    OR  PUBLIC  CREDIT. 

of  their  conversion  or  excliangc  for  other  evidences  of 
indebtedness;  and  of  their  ultimate  redemption  or  ex- 
tinction. 

(o)  Classification  of  Public  Debts. — Public  debts  may 
be  classified  in  several  ways.  The  commonest  classifi- 
cation divides  such  debts  into  funded  and  unfunded  or 
floating  debts.  Funded  debts  are  such  as  have  been  for- 
merly acknowledged  by  the  government  and  whose  in- 
terest is  regularly  provided  for  by  law.  The  name  was 
applied  because  the  interest  due  the  holders  of  such  debts 
in  England  was  originally  paid  out  in  certain  specified 
funds  or  taxes.  The  funded  debt  exists  ordinarily  in  the 
shape  of  bonds  or  annuities.  Unfunded  or  floating  debts 
consist  often  of  various  unpaid  accounts  charged  against 
the  state  for  supplies  furnished  or  services  rendered  to  the 
government  or  its  agents.  These  debts  are  largely  cur- 
rent outstanding  accounts  which,  though  unpaid,  ordi- 
narily draw  no  interest.  The  holders  of  such  claims 
against  the  government  sometimes  are  allowed  to  ex- 
change them  for  evidences  of  the  state's  funded  debt. 
The  funded  debt  of  the  United  States  is  in  the  form  of 
bonds,  either  registered  at  the  Treasury  with  the  name 
of  the  owner,  or  in  the  owner's  hands  in  the  shape  of 
coupon  bonds.  The  government  remits  the  interest  di- 
rect to  the  owners  of  the  registered  bonds,  and  cashes 
the  coupons  of  the  other  class  of  bonds  as  these  coupons 
mature.  Unfunded  debts  often  are  rolled  up  when  the 
government  purchases  supplies  with  great  rapidity  and 
in  great  quantities,  and  omits  to  make  immediate  pay- 
ment. Thus  after  our  late  Civil  War  the  unfunded  debt 
was  in  excess  of  $1,000,000,000.  Unfunded  debts  in  the 
past  have  often  been  incurred  by  American  cities  where 
the  city  officials  without  legal  warrant  have  purchased 
goods  and  given  the  seller  an  acknowledgment  of  the 


THE   TECHNIQUE  OF  PUBLIC  BORROJVING.         303 

debt.  It  is  needless  to  say  that  sound  finance  discoun- 
tenances such  a  lawless  policy. 

But  public  debts  may  be  classified  not  only  on  the  basis 
of  the  absence  or  presence  of  formal  provisions  for  the 
regular  payment  of  the  interest  thereupon,  but  also  with 
reference  to  the  time  they  have  to  run  before  the  state's 
obligation  to  pay  the  principal  of  the  debt  becomes  due. 
The  bonds  of  the  United  States,  of  the  commonwealths, 
and  of  the  smaller  civil  divisions  generally  mature  at 
certain  definite  dates.  The  federal  government  has  the 
option  of  repaying  at  will  the  principal  of  a  small  part  of 
its  debt ;  upon  the  greater  part  it  may  repay  the  princi- 
pal after  a  certain  specified  term.  The  greater  part  of 
the  funded  public  debt  of  other  nations  is  in  the  form  of 
what  is  known  as  "  perpetual  debt."  This  does  not  im- 
ply that  the  debt  is  to  exist  for  all  time,  but  simply  that 
foreign  governments  guarantee  their  creditors  only  an 
annual  income,  called  an  annuity,  or  rente,  without  any 
definite  promise  ever  to  repay  the  principal.  These  foreign 
governments,  however,  generally  reserve  the  right  to  re- 
pay the  principal  whenever  they  see  fit,  provided  always 
they  have  the  money  requisite  for  the  purpose.  In  addi- 
tion to  the  typical  American  form  of  public  debts  ma- 
turing at  some  future  time,  there  are  other  forms 
employed  by  continental  states.  In  return  for  the  capi- 
tal they  borrow  they  sometimes  guarantee  annuities 
which  terminate  with  the  death  of  the  annuitant,  or  at 
the  end  of  a  given  term  of  years.  Sometimes,  moreover, 
they  issue  bonds  whose  repayment  is  determined  by  pe- 
riodical drawings,  the  bonds  being  put  into  classes,  and 
a  certain  number  being  selected  by  lot  from  time  to  time 
for  repayment.^ 

Lastly,   public   debts   are   often   classified   as   interest 

^  I^eroy-Beaulieu,  Science  des  Finances,  Vol.  II.,  p.  29^, 


304  CONCERNMENT  BORROIVING,   OR  PUBLIC  CREDIT. 

bearing  and  those  bearing  no  interest.  This  distinction  is 
of  service,  not  in  contrasting  the  funded  with  the  floating 
debt,  but  in  dividing  off  the  funded  debt  from  such  gov- 
ernment promises  which  circulate  as  money  ^  and  are 
often  endowed  with  the  prerogative  of  serving  as  a  legal 
tender  in  payment  of  debts  between  individuals.  Such 
government  promises  to  pay  coin  to  the  bearer  do  not 
ordinarily  bear  interest.  They  purport  to  be  redeemable 
in  coin  on  presentation,  and  are  often  so  redeemed. 
This  form  of  public  debt  is  unique  in  a  number  of  ways, 
owing  mainly  to  the  fact  that  such  evidences  of  the 
public  debt  pass  ordinarily  from  hand  to  hand  and  serve 
as  a  common  medium  of  exchange.  When  a  govern- 
ment pays  out  such  promises  in  the  purchase  of  supplies 
or  in  the  payment  of  official  salaries,  such  promises  will 
be  accepted  in  ordinary  domestic  commercial  dealings  so 
long  as  there  is  no  distrust  of  the  government's  ability 
and  willingness  to  redeem  them  in  coin  at  their  face 
value  on  presentation.  By  increasing  the  amount  of  the 
currency  these  notes  tend  to  raise  the  general  price  level 
and  to  drive  out  of  circulation  an  approximately  equiva- 
lent amount  of  coin  which  is  melted  down,  exported, 
or  hoarded  away.  When  all  the  standard  coin  has  been 
displaced,  or  even  before,  if  discredit  attaches  to  these 
notes,  they  will  depreciate  in  purchasing  power,  and 
their  value  thenceforward  will  depend  partly  on  their 
quantity  and  partly  on  the  estimate  the  commercial 
world  makes  of  the  remoteness  of  their  redemption  in 
coin.  The  apparent  gain  which  is  derived  from  saving 
the  interest  on  the  public  debt  bearing  no  interest 
is   generally   offset   by   the   depression   of  public   credit 

*  Besides  bonds  and  annuities,  some  governments  borrow 
money  for  short  time  periods,  usually  not  longer  than  a  year, 
by  emitting  interest  bearing  treasury  notes  or  exchequer  bills. 
These  do  not  circulate  as  currency,  however.    See  p.  371,  note. 


THE   TECHNIQUE   OF  PUBLIC  BORROIVING.  305 

thus  caused,  the  higher  rate  of  interest  exacted 
in  consequence  by  the  purchasers  of  government 
bonds,  and  more  than  all  else  by  the  element  of 
uncertainty  introduced  into  commercial  dealings  by 
a  disordered  paper  currency.  They  have  proved  the 
most  costly  as  they  are  unquestionably  the  most  in- 
sidious form  of  public  debts.  Even  after  the  exigency 
which  called  them  forth  has  passed  away,  they  often  re- 
main for  years  to  vex  and  harass  industry  and  commerce, 
and  their  restored  parity  with  the  coin  they  ostensibly 
represent  can  be  secured  only  when  there  occurs  a  for- 
tuitous conjunction  of  such  events  as  budgetary  equilib- 
rium, a  favorable  current  of  foreign  trade,  and  a  return 
of  legislative  sanity.  Their  discussion,  however,  belongs 
more  properly  to  the  subject  of  money  and  banking  than 
to  finance  proper. 

(&)  Negotiation  of  Public  Debts. — Various  ques- 
tions of  detail  arise  when  once  it  is  determined  that 
a  government  is  to  borrow  money  by  the  sale  of 
its  securities.  The  placing  of  such  loans  has  been 
undertaken  at  times  by  banks  or  brokers  who  have  acted 
as  the  government's  agents.  More  recent  experience 
seems  to  demonstrate  the  ability  of  the  federal  govern- 
ment to  serve  itself  in  this  matter.  Prudence,  tact,  and 
business  methods  generally  enable  the  Treasury  to  adver- 
tise and  place  its  loans  with  less  expense  than  would  be 
involved  by  employing  banks  or  brokers  to  act  as  inter- 
mediaries between  the  public  and  the  Treasury. 

Much  more  momentous  than  the  question  of  hiring  a 
broker  to  place  a  government  loan  are  such  problems 
as  these :  what  rate  of  interest  shall  be  offered ;  shall 
the  securities  issued  be  sold  at  par,  below  par,  or  above ; 
shall  the  securities  be  uniform  in  tenor  or  is  variety  de- 
sirable ;   shall  the  repayment  of  the  principal  be  gnaran- 


3o6    GOyERNMENT  BORROIVING,   OR  PUBLIC  CREDIT. 

teed  at  all,  and  if  so,  when ;  and  lastly,  is  it  advisable  to 
tax  such  public  securities  or  the  income  which  springs 
from  them  ? 

So  far  as  the  rate  of  interest  is  concerned,  it  must  be 
remembered  that  the  g-overnment  has  not  the  power  ar- 
bitrarily to  determine  the  rate  which  it  will  pay  upon 
the  capital  it  borrows,  and  this  for  the  simple  reason 
that  it  takes  two  to  make  a  barp^ain.  The  private  capi- 
talist will  not  lend  unless  he  gets  what  seems  to  him 
fair  rennmeration.  Public  credit,  hke  private  credit,  is 
gauged  by  the  money-market,  and  the  finance  minister 
must  pay  the  price  asked,  or  go  without  the  accommoda- 
tion he  desires.  He  may  perhaps  conceal  the  real  rate 
of  interest  he  pays  by  fixing  a  nominal  rate  of  interest 
upon  the  securities  to  be  marketed,  and  then  selling  them 
below  par.  But  he  cannot  simply  dictate  the  rate  of  in- 
terest. The  solvency  of  the  government  cannot  be  ma- 
terially altered  by  his  fiat.  He  does  his  duty  when  he 
intelligently  ascertains  the  market  estimate  of  the  public 
credit,  and  this  he  may  learn  by  making  explicit  the 
terms  of  the  proposed  loan,  and  inviting  competitive 
bids  from  would-be  purchasers  of  the  public  securities. 

Several  considerations  emerge  when  the  question  is 
mooted  of  selling  bonds  at  par  or  below.  There  is,  first 
of  all,  a  sentimental  consideration  which  always  weighs 
somewhat  in  the  matter,  to  wit,  the  official  and  also  the 
public  pride  in  seeing  the  public  debt  sell  at  par  or,  if 
possible,  above.  But  it  may  happen  that  the  nominal 
rate  of  interest  offered  is  so  low  that  the  loan  must  be 
contracted  below  par  or  not  at  all.  Or  it  may  chance 
that  the  rate  of  interest  which  would  have  to  be  guaran- 
teed to  market  the  securities  at  par  would  exceed  the 
rate  commonly  allowed  by  law,  and  would  be  usurious 
if  exacted  on  a  private  loan.     Of  still  greater  moment  is 


THE   TECHNIQUE  OF  PUBLIC  BORkOlVING.  %0l 

the  fact  that  on  public  securities  sold  below  par  a  lower 
rate  of  interest  will  be  accepted  by  the  public  creditor 
than  that  which  he  would  demand  if  the  loan  were  placed 
at  par  or  above.  If,  for  example,  a  bond  bearing  five  per 
cent,  interest  could  be  sold  at  par,  it  is  not  improbable 
that  a  four  per  cent,  loan  would  bring,  not  eighty  cents 
on  the  dollar  of  scrip,  but  eighty-five  cents  or  thereabouts. 
The  reason  is  this.  In  order  to  redeem  a  bond  sold  at 
par  the  state  must  return  a  dollar  for  each  dollar  origi- 
nally received.  Where  the  bond  has  been  sold  below  par, 
say  at  85,  the  state  must  pay  a  dollar  for  each  eighty- 
five  cents  originally  received.  In  other  words,  a  bond 
sold  below  par  offers  two  chances  of  gain,  the  annual 
interest  and  a  bonus  at  redemption,  the  bonus  being  the 
difference  between  the  actual  price  paid  and  the  nominal 
face  value  of  the  bond.  Should  the  state  be  in  a  posi- 
tion to  redeem  a  part  of  its  debt,  or  to  compel  its  credit- 
ors to  accept  a  low-interest  bond  for  a  high-interest 
bond,  it  will  be  more  likely  to  redeem  or  convert  the 
debt  which  was  sold  at  par  or  above.  Thus  a  longer 
duration  will  ordinarily  attach  to  the  bond  sold  below 
par.  For  these  reasons,  where  the  need  for  the  greatest 
possible  yield  from  the  sale  of  public  securities  outweighs 
the  estimated  utility  of  future  reductions  in  interest,  or 
redemption  of  debt,  financiers  have  sold  government  ob- 
ligations below  par.  Obviously,  there  can  be  laid  down 
no  rule,  in  the  placing  of  bonds  at  par  or  below,  except 
this,  that  where  the  policy  of  ultimate  debt  payment  is 
in  vogue,  the  realization  of  such  an  end  must  not  be  sac- 
rificed to  an  inconsiderable  present  gain.  For  the  policy 
but  recently  ( 1 898)  adopted  by  the  United  States  of  sell- 
ing bonds  at  par  to  small  purchasers  of  public  securities, 
when  other  larger  bidders  would  offer  a  premium,  there 
can  be  no  financial  justification.    Political  reasons,  such. 


3o8  GOVERNMENT  BORROIVING,  OR  PUBLIC  CREDIT. 

as  making  the  loan  ostensibly  a  "  popular  loan,"  may 
dictate  such  a  course,  but  sound  finance  never. 

This  weighing  of  present  against  future  must  also  de- 
termine to  a  very  large  extent  the  related  question  of 
uniformity  or  variety  in  the  public  debt.  If  administra- 
tive convenience  alone  were  consulted,  the  former  would 
prevail.  If  the  whims  of  bond  buyers  were  catered  to, 
we  should  emit  public  securities  in  endless  variety.  It 
is  probable  that  the  latter  plan,  like  that  of  placing  bonds 
below  par,  would  net  the  Treasury  the  greater  amount  in 
immediate  cash.  If  rates  of  interest,  periods  of  payment, 
and  duration  of  loans  were  all  adjusted  to  the  tastes  of 
purchasers,  they  would  be  willing  to  pay  a  trifle  extra 
for  this  accommodation.  Here  again  practical  exigen- 
cies must  determine.  It  is  hardly  probable,  however, 
that  the  immediate  need  of  money  will  be  so  imperative 
as  to  necessitate  an  endless  variety  in  public  securities. 
Indeed  there  are  some  advantages  in  having  at  most  a 
very  few  varieties.  Small  blocks  of  stock,  each  cum- 
bered by  its  own  peculiar  characteristics  or  eccentricities, 
are  less  readily  listed  and  less  generally  understood  than 
a  few  standard  varieties  judiciously  chosen.  Indeed  the 
time  has  almost  passed  when  governments  are  under  the 
necessity  of  catering  to  public  creditors  by  offering  them 
such  adventitious  inducements  as  were  in  vogue  formerly 
when  lotteries  and  prizes  of  all  descriptions  were  at- 
tached to  public  loans  in  order  to  invite  general  invest- 
ment in  government  securities. 

Whether  the  bond  owner  should  be  taxed  upon  his 
bonds  and  their  income  is  again  a  question  largely  to 
be  decided  upon  the  present  need  of  capital  as  compared 
with  the  future  need  of  revenue.  Guaranteeing  the 
bonds  against  future  taxation  undoubtedly  gives  them  a 
higher  value  on  the  market  than  if  their  ownership  car- 


THE   TECHNIQUE  OF  PUBLIC  BORROIVING.  309 

ried  with  it  the  Hability  of  tax  contribution.  Here,  how- 
ever, administrative  reasons  seem  to  favor  the  exemption 
of  pubUc  securities  from  taxation.  So  far  as  the  public 
debt  is  registered  upon  the  books  of  the  Treasury,  the 
taxation  of  such  debt  is  simplicity  itself.  The  tax  may 
even  be  deducted  before  the  interest  on  the  debt  is  re- 
mitted to  the  owner  of  the  bond.  But  where  the  govern- 
ment debt  is  not  registered,  but  exists  in  the  coupon 
form,  the  collection  of  taxes  imposed  thereupon,  unless 
by  means  of  a  stamp  tax,  would  not  be  so  easy.  The 
important  thing  is  that  the  question  of  the  bond-holder's 
liability  to  taxation  be  definitely  settled  when  the  bonds 
are  sold,  and  that  the  government  strictly  adhere  to  the 
bargain  it  makes.  Taxation  of  a  bond  sold  as  exempt 
from  taxation  amounts  to  partial  confiscation  of  the 
bond-holder's  property. 

(c)  Conversion  of  Public  Debts. — Not  infrequently  it 
happens  that  when  the  necessity  which  required  the  gov- 
ernment to  borrow  is  a  thing  of  the  past,  the  government 
can  obtain  money  at  a  lower  rate  of  interest  than  it  had 
to  pay  in  its  hour  of  need.  If,  therefore,  the  government 
has  the  right  to  repay  the  principal  of  its  debt  or  any  part 
thereof,  it  will  naturally  avail  itself  of  the  opportunity 
in  order  to  lessen  the  annual  interest  charge  which  is 
paid  out  of  current  taxation.  Often  this  process  of  con- 
version or  refunding  takes  the  form  of  offering  new  se- 
curities bearing  the  new  (and  lower)  rate  of  interest,  and 
using  the  proceeds  of  the  new  loan  to  pay  ofif  the  holders 
of  the  old  loan.  This  refunding  operation,  as  it  is 
termed,  sometimes  is  simplified  by  allowing  the  holders 
of  the  old  bonds  to  exchange  the  old  bonds  for  the  new 
at  some  rate  of  exchange  mutually  agreed  upon  by  the 
Treasury  and  the  public  creditor.  Where  the  public 
debt  is  largely  in  the  shape  of  perpetual  debt,  conversion 


3IO   GOyERNMENT  BORROIVING,    OR   PUBLIC   CREDIT. 

is  sometimes  effected  by  inducing  the  holder  of  a  per- 
petual annuity  to  exchanc^c  it  for  a  terminable  annuity. 
The  terminable  annuity  gives  the  annuitant  a  larger  an- 
nual income,  but  at  the  end  of  a  specified  period  lapses 
altogether.  A  similar  process  is  employed  to  convert 
long  time  annuities  into  short  time  annuities.^  As  re- 
marked above,  bonds  sold  at  or  near  par  oflfer  fewer 
obstacles  to  conversion  than  those  sold  below  par. 

((/)  The  Extinction  of  Public  Debts. — In  explaining 
the  process  of  convertingperpetual  annuities  into  termina- 
ble annuities  we  have  come  upon  one  method  by  which 
public  debts  are  sometimes  expunged.  The  question  of 
the  policy  of  paying  off  public  debts  remains  for  our 
consideration. 

It  seems  highly  probable  that  much  of  the  feeling  in 
favor  of  the  ultimate  redemption  of  the  public  debt  will 
be  found  to  rest  upon  what  is  really  an  illegitimate  anal- 
ogy between  public  and  private  indebtedness.  A  judi- 
cious horror  of  debt  is  doubtless  a  very  commendable 
sentiment  for  a  thrifty  individual  to  cherish.  But  to 
conclude  without  further  reflection  that  a  public  debt 
affects  a  nation  in  precisely  the  same  way  as  private  debt 
affects  an  individual  would  be  altogether  premature.  In 
saying  this  we  would  not  countenance  for  a  minute  the 
fallacious  idea  that,  except  where  interest  is  paid  to 
foreigners,  the  income  received  by  bond-holders  is  only 
a  transfer  from  one  set  of  citizens  to  another  set,  *  from 
the  right  hand  to  the  left,'  and  can  never  imply  a  na- 
tional sacrifice.  The  same  argument  would  apply  to 
justify  what  one  citizen  stole  from  another.  On  the 
other  hand,  the  sentiment  formerly  expressed  in  the 
United  States  in  favor  of  perpetuating  the  public  debt 

^The  term  conversion  is  sometimes  employed  to  designate 
the  legally  authorized  exchange  of  evidences  of  funded  debt  for 
floating  debts  that  have  been  duly  audited. 


THE   TECHNIQUE  OF  PUBLIC  BORROIVING.  31 1 

in  order  to  provide  forever  a  bond  security  for  the  note- 
circulation  of  the  national  banks,  or  to  afiford  all  classe.- 
an  opportunity  to  invest  their  savings,  will  be  found 
equally  fallacious.  The  real  effect  of  a  public  debt,  it 
cannot  be  too  often  repeated,  is  the  exaction  it  makes 
upon  the  taxpayer  for  the  benefit  of  the  bond  owner. 
Whether  this  sacrifice  is  excessive  depends  altogether, 
if  we  view  the  matter  retrospectively,  on  what  good  the 
community  realized  or  is  realizing  from  the  proceeds  of 
the  loan ;  and  putting  aside  repudiation  as  unthinkable, 
the  whole  question  of  repaying  the  principal  of  a  public 
debt  must  rest  upon  a  comparison  of  the  sacrifice  to  be 
entailed  by  heavier  taxation  in  the  present  against  the 
gain  to  be  anticipated  from  lighter  taxation  in  the  future. 
The  arguments  for  and  against  the  policy  of  debt  pay- 
ment are  partly  economic  and  partly  political.  We  have 
already  had  occasion  to  review  the  economic  argument 
that  the  repayment  of  the  bond-holder  will  convert  him 
into  an  active  man  of  business.  Indeed  a  very  plausible 
argument  might  be  made  to  show  the  industrial  danger 
of  just  such  a  policy.  If  the  bond-holders  as  a  class  are 
assumed  to  be  retired  gentlemen  long  unacquainted  with 
actual  business,  a  policy  which  would  put  into  their 
hands  a  large  amount  of  actual  capital  which  they  had 
personally  to  invest  in  productive  enterprises,  on  pain  of 
losing  their  incomes  altogether,  might  result  in  the  loss 
of  that  capital  both  to  the  capitalists  and  to  the  nation. 
Suppose,  for  example,  that  the  bond-holders  of  a  railway 
system  were  given  in  final  satisfaction  of  their  claims 
several  branch  lines  in  fee  simple  and  were  thenceforth 
under  the  necessity  of  operating  the  branch  lines  them- 
selves. Is  there  reason  to  suppose  that  either  they  or 
the  community  would  benefit  by  such  a  payment  of  the 
railway's  bonded  indebtedness  ?    Where  the  proceeds  of 


312    GOVERNMENT  BORROIVING,   OR  PUBLIC  CREDIT. 

a  pul)lic   loan   have  been   invested   in  tangible  material 
property  yielding^  income  in  the  shape  of  actual  money 
revenue,   or  in  the  form  of  general   utility,   and  where 
either  out  of  the  earnings  of  the  first  or  out  of  the  ap- 
preciating value  of  the  second  all  danger  or  expense  on 
the  score  of  depreciation,  replacement,  repairs,  and  the 
Hke  is  removed,  there  is  no  sound  economic  reason  which 
inevitably  dictates  the  repayment  of  the  principal  of  the 
debt,  any  more  than  there  is  a  reason  why  the  tenant 
of  a  rented  house,  if  the  rent  be  moderate  and  the  house 
commodious,  should  inevitably  purchase  the  house  out- 
right.    The   economic   argument   for  the   repayment  of 
the  principal  of  public  debts  applies,  however,  to  most 
cases  of  local  indebtedness  where  the  loan  has  been  em- 
bodied in  public  property  of  some  kind,  such  as  sewers, 
streets,   parks,   and   public   buildings,   where   the   public 
property  in  question  is  subject  to  depreciation,  wear  and 
tear,  and  will  require  ultimate  replacement.     To  neglect 
in  such  cases  to  repay  the  principal  of  the  debt  would  be 
to  confront  a  situation  in  future  where  the  utility  of  the 
property  had  vanished,  and  the  debt  charge  had  become 
a  burden  holding  the  community  in   mortmain.     Here 
unquestionably  the  economic  life  of  the  property  as  es- 
timated by  competent  engineers  must  determine  the  pe- 
riod  at  the   end   of  which   the   debt   incurred   for   such 
property  ought  to  have  been  extinguished.^ 

^  Dietzel  (System  der  Staatsanlcihcn)  has  developed  an 
ingenious  but  dangerous  theory  which  minimizes  the  neces- 
sity of  repaying  the  principal  of  certain  public  debts  where, 
though  there  remain  no  tangible  public  assets,  there  is  assumed 
to  exist  a  certain  amount  of  "  immaterial  capital  "  capable  of 
giving  ofT  income  sufticient  to  meet  the  permanent  interest 
charge.  If,  for  example,  tlie  state  should  sell  bonds  to  equip 
a  system  of  industrial  schools,  the  trained  ability  of  the  pupils 
would  constitute  in  his  view  "  immaterial  capital  "  suflTcient  to 
pay  the  interest  on  the  loan  even  after  the  school  buildings  had 
become  useless.     Such  "  immaterial  capital "  is  not  measurable, 


THE    TECHNIQUE   OF  PUBLIC  BORROIVING.  313 

The  chief  reason  for  the  redemption  of  debts  created 
by  our  state  and  local  governments,  then,  is  an  economic 
reason,  and  the  rapidity  of  such  repayment  can  be 
gauged  generally  on  concrete  grounds.  On  the  other 
hand,  the  great  reason  for  the  expungement  of  national 
obligations  is  political  rather  than  economic.  Nothing 
is  of  such  essential  assistance  to  a  nation  in  war  time  ai 
unimpaired  credit,  and  nothing  impairs  the  national  credit 
so  much  as  a  heavy  and  permanent  debt  charge.  If  the 
adage,  "  In  time  of  peace  prepare  for  war,"  be  sound, 
the  payment  of  a  national  debt  with  as  great  rapidity  as 
is  compatible  with  reasonable  commercial  and  industrial 
prosperity  is  sound  policy.  The  rate  at  which  repay- 
ment is  made  must  depend  on  the  extent  to  which  it  is 
wise  to  extend  taxation  beyond  the  current  ordinary  ex- 
penses of  the  government.  Taxes  that  especially  hamper 
industry  may  be  taken  off  in  the  hope  that  the  freeing 
of  enterprise  will  be  felt  in  a  heavier  yield  of  the  taxes 
still  left  in  force.  Still  it  is  conceivable  that  the  national 
debt  payment  may  be  carried  on  with  too  great  rapidity. 
The  disinclination  nations  show  to  carry  war-taxes  after 
peace  has  been  concluded  shows  that  they  prefer  present 
relief  to  a  future  exemption  from  meeting  debt  charges. 
Nor  is  there  any  special  utility  in  national  finance  of  set- 
ting, aside  a  fixed  amount  or  sinking  fund,  each  year,  ir- 
respective of  current  income  and  current  expenses.  The 
only  effective  sinking  fund  for  purposes  of  our  federal 
government  is  such  due  economy  in  time  of  peace  that 
a  clear  surplus  shall  be  left  over  from  year  to  year  which 
may  be  applied  to  the  extinction  of  a  part  of  the  public 
debt,  either  through  the  ordinary  methods  of  redemption 

and  such  public  property,  though  it  involve  what  is  extraor- 
dinary expense  for  a  year,  involves  what  is  ordinary  expense, 
if  we  take  a  generation  for  our  time  period.  It  ought  therefore 
to  be  paid  for  within  the  generation. 


314  GOVERNMENT  BORROIVING,   OR  PUBLIC  CREDIT. 

of  the  debt  at  maturity,  or  by  purchasing  it  before  ma- 
turity in  the  open  market.  On  the  other  hand,  local 
debts  ought  to  be  repaid  within  a  calculable  period.  The 
expenses  of  the  smaller  units  of  government  are  not 
likely  to  be  suddenly  increased  by  unforeseen  exigen- 
cies such  as  war.  A  sinking  fund  provision  which  re- 
quires a  certain  amount  to  be  raised  yearly  and  applied 
to  the  redemption  of  the  local  debt  is  a  safe  and  com- 
mendable financial  device. 


CHAPTER  II. 

RELATION  OF  THE  FEDERAL  TREASURY  TO  OUR 
MONETARY   SYSTEM. 

Administrative  Detail. — Outlined  in  the  preceding- 
chapter  stands  a  brief  description  of  the  abstract 
process  of  borrowing  on  the  public  credit  which 
financiers  commonly  avail  themselves  of  in  order 
to  meet  a  current  deficit.  To  complete  the  subject 
of  Treasury  Management  a  synopsis  of  the  actual 
processes  of  fiscal  administration  ought  perhaps  to  be 
added.  That  is  to  say,  some  account  of  the  typical  kinds 
of  work  performed  by  the  various  departments  of  the 
ordinary  state  or  city  treasury  would  naturally  be  next 
in  order.  We  should  have  to  eliminate,  of  course,  a 
thousand  and  one  peculiarities  of  detail  which  have  be- 
come engrafted  on  the  fiscal  regimes  of  the  different 
commonwealths.  But  allowing  for  these  differences,  we 
should  find  very  general  employment  of  some  system  of 
anticipating  the  yield  of  taxes  by  a  sale  of  speedily  ma- 
turing bonds  whose  proceeds  become  immediately  avail- 
able for  public  needs,  and  whose  repayment  is  made  out 
of  the  taxes  as  they  are  finally  paid  in.  We  should  find 
numerous  examples  of  a  curious  and  rather  cumbrous 
system  1  of  public  book-keeping  where  the  public  moneys, 
instead  of  being  lumped  together  in  one  general  balance, 

^  See  Seligman,  Finance  Statistics  of  American  Common- 
wealths; also  E.  L.  Bogart,  Die  Finansverhdltnisse  der  Einzel- 
staaten  der  nordamerikanischen  Union. 

31S 


3l6  POSITION  OF   THE    TREASURY. 

are  apportioned  and  credited  to  numerous  "  funds,"  as 
they  are  termed,  each  fund  appropriated  to  some  specific 
object,  such  as  education,  and  each  having  not  infre- 
quently a  sort  of  lien  upon  a  given  fraction  of  the  com- 
monwealth's receipts.  We  should  be  under  the  necessity 
of  recounting  the  various  steps  by  which  the  revenues  are 
covered  into  the  treasury,  of  the  methods  by  which  such 
revenues  are  safeguarded,  and  disbursed  only  in  accord- 
ance with  law  by  means  of  warrants  drawn  by  the  proper 
official  upon  the  custodian  of  the  public  moneys.  The 
whole  process  of  securing  vouchers  for  the  sums  so  paid 
out,  and  the  details  of  accounting  and  audit,  both  by  the 
administrative  departments  and  also  by  investigating 
committees  of  the  legislature,  would  have  to  be  re- 
hearsed. There  are  naturally  countless  minor  differences 
in  the  fiscal  administration  of  the  commonwealths,  rang- 
ing all  the  way  from  no  system  to  the  excessive  red  tape 
of  a  veritable  Circumlocution  Office.  But  a  delineation 
of  such  administrative  processes  would  be  aside  from 
our  present  purpose.  Nor  would  the  most  general  ac- 
count suffice  equally  for  the  federal  and  the  state  treasury 
departments.^ 

It  is  not  merely  because  of  the  greater  size  and 
importance  of  the  former  that  there  is  need  of  a  special 
study  of  the  federal  Treasury,  but  because  that  bureau, 
in  addition  to  its  ordinary  fiscal  functions,  has  been 
charged  with  doing  an  immense  banking  business. 
There  is  no  more  natural  or  necessary  connection  be- 
tween collecting  public  money  and  banking  than  be- 
tween   running    a    grocery    store    and    banking.      But 

*A  full  description  of  the  various  departments  of  the  Treas- 
ury and  their  duties  may  be  found  in  Senate  Report  507,  Part  3, 
Soth  Congress,  ist  session  (1888).  See  also  the  Political  Science 
Quarterly  for  1891  and  i8q2.— The  Control  of  National  Expendi- 
tures, by  E.  I.  Renick  and  N.  H.  Thompson. 


THE  STATUS  OF  THE   TREASURY.  31 7 

Congress  in  its  wisdom  has  joined  together  these  things 
which  the  ordinary  laws  of  trade  would  have  put  asunder, 
and  the  infelicities  of  the  ill-assorted  match  demand 
attention. 

Every  other  public  treasury  in  the  United  States  re- 
ceives the  currency  it  finds  in  circulation  and  pays  it 
out  again,  and  has  no  further  concern  with  the  circu- 
lating medium.  The  Treasury  of  the  United  States,  on 
the  other  hand,  is  concerned  not  only  with  the  collection 
and  disbursement  of  money,  but  much  of  this  very 
money  which  it  collects  and  pays  out  is  the  child  and 
creature  of  the  Treasury  itself.  Naturally,  complica- 
tions must  arise  under  a  system  where  the  Treasury  in 
the  capacity  of  national  publican  at  the  receipt  of  custom 
receives  back  again  its  own  promissory  notes,  and  where 
the  Treasury  as  public  paymaster  issues  these  same  notes 
to  its  creditors,  and  undertakes  at  all  times  to  redeem 
them  on  demand  in  coin. 

The  Status  of  the  Treasury. — The  haphazard  character 
of  our  American  method  of  administration  is  well  illus- 
trated in  the  present  constitution  and  work  of  the  Treas- 
ury Department.  The  tendency  we  betray  of  delegating 
to  a  governmental  bureau  additional  duties  as  need  arises 
from  time  to  time  is  exemplified  in  the  curious  farrago 
of  minor  interests  with  which,  in  despite  of  any  appear- 
ance of  logical  allotment,  the  Treasury  is  now  charged. 
Apart  from  the  more  or  less  divergent  claims  of  banking 
and  tax  collection,  the  Treasury  is  obliged  to  look  after 
the  steamboat  inspection  service,  the  lighthouse  service, 
the  life-saving  service,  the  marine  hospital  service,  and 
the  national  quarantine.  There  seems  to  be  no  end  to 
the  accretion  of  adventitious  duties  growing  out  of  the 
Treasur}''s  use  of  the  revenue  marine  to  collect  the  cus- 
toms.     Thus  Oregon  salmon  and  Alaskan  seals  figure 


31 8  POSITION  OF   THE   TREASURY. 

among  the  latest  proteges   of  that   ubiquitous   depart- 
ment. 

The  history  of  the  development  of  the  Treasury  makes 
a  curious  story.  It  illustrates  the  early  triumph  of  the 
advocates  of  an  entire  divorce  between  bank  and  state. 
It  e.xemplifies  as  well  the  gradual  disintegration  of  this 
once  accepted  principle,  and  the  well-nigh  universal 
dominance  of  the  exact  opposite — the  union  of  bank 
and  state.^  The  people  of  the  United  States,  through 
Congress,  chartered  the  first  bank  of  the  United  States 
early  in  Washington's  administration.  The  federal  gov- 
ernment itself  was  a  large  stockholder  in  the  bank,  which 
kept  the  public  moneys  on  deposit  and  furnished  a  uni- 
form and  acceptable  paper  currency  for  twenty  years. 
Then  the  Bank's  charter  expired,  and  the  attempt  to 
extend  it  proved  unavailing.  After  the  war  of  1812 
Congress  was  again  induced  to  charter  for  twenty  years 
the  second  Bank  of  the  United  States,  and  again  the 
federal  government  became  a  large  stockholder  in  the 
Bank  and  appointed  a  part  of  the  board  of  directors.  As 
before,  the  Bank  acted  as  the  financial  agent  and  deposi- 
tory of  the  national  government,  and  furnished  the  com- 
monly employed  paper  currency  of  the  land.  It  would 
take  us  too  far  out  of  our  narrow  course  to  go  into  the 
details  of  the  "  Bank  War  "  which  was  waged  against 
the  Bank  with  unrelenting  virulence  by  Andrew  Jackson 
while  President,  and  which  resulted  in  the  complete  dis- 
comfiture of  the  Bank  and  its  final  extinction.  The 
business  of  supplying  a  paper  currency  thereafter  was 
taken  up  with  avidity  by  the  banks  chartered  by  the  vari- 
ous states.     The  federal  Treasury  for  a  while  availed  it- 

*  See  David  Kinley,  The  Independent  Treasury  of  the  United 
States;  also  A.  C.  Gordon,  Congressional  Currency;  also  the 
articles  on  the  Independent  Treasury  in   Lalor's  Encyclopedia. 


THE  STATUS  OF  THE   TREASURY.  3^9 

self  of  some  of  these  state  banks — "  pet  banks,"  as  they 
were  termed  in  the  pohtical  slang  of  the  day — and  de- 
posited funds  therein.  The  crisis  of  1837  proved  that 
the  Treasury  had  made  a  rueful  bargain,  and  the  loss 
of  public  money  through  bank  failures  and  the  suspen- 
sion of  specie  payments  brought  the  federal  government 
into  the  lowest  financial  straits.  Thereafter  it  was  re- 
solved that  the  government  should  be  the  custodian  of 
its  own  funds,  and  after  several  abortive  attempts  the 
Independent  Treasury  was  created  by  Act  of  Congress — 
a  real  entity,  as  opposed  to  the  legal  shadow  it  had  pre- 
viously been.  The  name — Independent  Treasury — 
was  itself  meant  to  be  a  pubHc  renunciation  of  any  future 
union  of  bank  and  state.  The  Act  of  August  6,  1846, 
provided  quarters  for  the  Independent  Treasury,  pro- 
hibited it  from  depositing  any  of  its  funds  with  the  state 
banks,  and  forbade  it  to  accept  in  payment  of  taxes  or 
otherwise,  the  circulating  notes  issued  by  the  state  banks. 
The  Treasury  could  receive  and  disburse  only  coin  or 
its  own  obligations,  and  the  divorce  of  bank  and  state 
was  seemingly  made  complete  and  efTectual.  This  policy 
of  isolation  lasted  until  the  Civil  War.  Since  that  time 
the  history  of  the  Treasury  is  the  story  of  successive 
reversions  to  a  radically  different  type  of  fiscal  organ- 
ism. Between  1846  and  1861  the  Treasury  pursued 
with  success  its  plan  of  keeping  its  own  funds,  of  re- 
ceiving specie  and  of  paying  it  out  again.  Its  transactions 
were  on  a  comparatively  modest  scale,  for  extravagant 
expenditures  were  then  neither  necessary  nor  popular, 
and  no  untoward  effect  was  produced  upon  the  general 
monetary  circulation  by  the  relatively  insignificant 
amount  of  coin  the  Treasury  at  one  time  held  or  at 
another  time  disbursed.  The  Treasury  was  reproached 
by  its  critics  for  refusing  to  recognize  the  system  of 


330  POSITION   OF   THE   TREASURY. 

bank  credit  which  the  people  availed  themselves  of  in 
their  ordinary  commercial  transactions.  But  the  "  hard 
money  "  policy  of  the  Treasury  was  amply  justified  on 
more  than  one  occasion.  In  the  crisis  of  1857  the  Treas- 
ury experienced  no  embarrassment  whatever,  in  marked 
contrast  to  the  agonized  struggles  of  the  banks,  and  in 
contrast  to  the  plight  of  the  Treasury  itself  twenty  years 
before,  when  the  funds  had  been  placed  in  the  keeping  of 
the  state  banks.  Moreover,  while  the  rigid  requirement 
of  payments  in  specie  occasioned  what  many  chose  to 
represent  as  unnecessary  hardship  in  the  light  of  the 
developed  state  of  credit  transactions,  still  the  Treasury's 
insistence  upon  a  coin  basis  was  of  inestimable  advan- 
tage in  an  era  when  people  were  not  only  willing  to  use 
credit,  but  altogether  too  prone  to  abuse  it.  The  Treas- 
ury more  than  once  stood  forth  as  a  beacon  of  light  in 
the  darkness  when  the  country  was  in  the  throes  of 
financial  disaster.  It  is  true  that  there  were  issued  from 
the  Treasury  during  the  period  1846-61  its  own  pronns- 
sory  notes  which  circulated  to  some  extent  as  currency, 
and  were  receivable  for  taxes.  But  the  amount  of  these 
notes  was  never  great.  They  were  never  made  by  law 
a  legal  tender  in  payment  of  private  debts,  and  their 
volume  never  necessitated  any  special  specie  reserve  to 
provide  for  their  redemption. 

All  this  was  speedily  changed,  beginning  in  1861. 
The  necessity  for  speedily  obtaining  capital  induced 
Secretary  Chase  first  to  break  down  the  barriers  that 
had  been  erected  between  the  Treasury  and  the  1;anks 
by  approaching  the  banks  to  obtain  loans  from  them 
on  several  occasions.  Next,  the  cautious  traditional 
policy  of  strictly  limiting  the  amount  of  circulating 
notes  issued  by  the  Treasury  was  flung  aside,  and  issue 
lifter  issue  of  promissory  notes  was  made  at  Secretary 


THE  STATUS   OF   THE   TREASURY.  32 1 

Chase's  suggestion  and  with  the  approval  of  Congress. 
These  notes  were  clothed  with  the  prerogative  of  being 
a  legal  tender,  and  were  forced  into  circulation.  Finally, 
in  1863  and  1864,  the  National  Bank  system  was  insti- 
tuted ;  and,  the  better  to  afford  a  market  for  United 
States  bonds,  the  national  banks  were  allowed  to  issue 
upon  the  deposit  of  such  United  States  bonds  as  they 
had  purchased,  a  national  currency,  acceptable  by  the 
Treasury  except  for  certain  specified  dues,  and  to  be  used 
by  the  Treasury  along  with  its  own  obligations  in  or- 
dinary payments  to  its  creditors.  The  Treasury  under- 
took, moreover,  to  serve  as  the  central  redemption 
agency  for  the  national  banks,  and  Congress  finally 
drove  into  the  national  banking  system  most  of  the  still 
recalcitrant  state  banks  by  imposing  a  prohibitory  tax 
upon  their  circulating  notes.  Finally,  the  last  landmark 
which  hemmed  oflf  the  Treasury  from  the  banks  was 
swept  away  when  the  national  banks  were  made  by  law 
authorized  depositories  for  the  public  moneys.  Within 
twenty  years  after  the  legal  creation  of  the  Independent 
Treasury,  the  Treasury  was  independent  in  name  only ; 
and  the  absolute  divorce  between  bank  and  state  which 
Jackson  and  his  party  had  striven  for  and  attained  was 
set  aside,  and  the  closest  union  between  these  two  finan- 
cial orj^ans  has  existed  ever  since. 

Of  all  the  executive  departments  of  the  general  gov- 
ernment the  Treasury  is  most  complex  and  inclusive. 
Besides  the  central  treasury  office  at  Washington,  there 
are  nine  sub-treasuries  in  as  many  large  cities,  several 
mints,  assay-offices,  and  numerous  other  offices  and 
agencies,  including  a  varying  number  of  National  Bank 
depositories,  scattered  throughout  the  land.  The  head  of 
the  bureau,  the  Secretary  of  the  Treasury,  is  a  cabinet 
minister  and  an  adviser  of  the  Presi(ient.     Under  the 


32  2  POSITION   OF   THE    TREASURY. 

Secretary  stand  the  Treasurer,  the  Assistant  Treasurers, 
the  Comptroller  of  the  Currency  (the  head  of  the  Na- 
tional l!ank  system),  the  Register  of  the  Treasury,  the 
Director  of  the  Mint,  three  Assistant  Secretaries,  and  a 
liost  of  under-ofificials,  clerks,  and  employes  in  the  vari- 
ous ramifications  of  the  several  suh-departments  of  the 
Treasury  system.  Of  all  the  executive  departments  t!  e 
Treasury  and  the  Post-ofifice  most  frequently  and  ex- 
tensively come  in  contact  with  the  people  and  affect 
them  for  good  or  for  evil. 

Fiscal  Functions  of  the  Treasury. — Had  the  Treasury 
permanently  conformed  to  the  design  of  the  founders 
of  the  Independent  Treasury,  there  would  be  little  to  say 
about  its  fiscal  operations — of  its  collecting  and  spend- 
ing the  public  money — which  would  not  be  equally  true 
of  the  treasuries  of  the  various  commonwealths.  In 
magnitude  of  operations  alone  the  federal  treasury 
might  be  found  to  differ  from  the  analogous  fiscal  en- 
gines in  the  states.  It  would,  of  course,  be  necessary  to 
point  out  that  the  federal  revenue  is  derived  from  sources 
different  from  the  revenue  sources  of  the  states  and 
smaller  civil  divisions.  The  federal  government,  more- 
over, has  been  charged  from  the  beginning  with  the 
dutv  of  striking  coins,  and  to-day  at  its  mints  converts 
without  charge  into  standard  coin  all  gold  deposited  for 
the  purpose  by  its  citizens.  This  is  a  duty  which  the 
treasury  departments  of  the  states  are  absolved  from. 
Theirs  is  the  simpler  task  to  collect,  safeguard,  disburse, 
and  account  for  their  revenues.  So  long  as  we  do  not 
trench  upon  administrative  detail  we  may  say  as  much, 
or  rather  as  little,  of  the  United  States  Treasury.  Into  its 
charge  fall  the  federal  taxes  from  customs  and  the  inter- 
nal revenue,  and  from  postal  and  miscellaneous  receipts. 
The  proceeds  of  bond  sales  are  also  in  the  first  instance 


FISCAL   FUNCTIONS   OF   ThF    TREASURY.  323 

covered  into  the  Treasury.  The  distribution  of  its  cash 
assets  among  the  sub-treasuries,  as  well  as  the  placement 
of  its  funds  in  designated  depositories,  requires  careful 
attention  and  sound  judgment.  The  same  may  be  said 
of  protecting  against  loss  the  cash  assets  in  the  Treasury, 
and  rigidly  accounting  for  all  funds  from  the  time  of 
their  receipt  to  the  day  of  their  disbursement.  In  one 
way  alone  is  the  Treasury  in  the  performance  of  its 
strictly  fiscal  duties  liable  to  create  serious  difificulty — a 
difficulty,  moreover,  which  can  hardly  arise  from  the  op- 
eration of  other  public  treasuries  in  the  United  States. 
We  refer  to  the  contraction  of  the  currency  by  Treasury 
absorptions  in  excess  of  disbursements.  The  receipts  of 
the  Treasury  are  regular,  and,  excepting  the  proceeds 
of  bond  sales,  do  not  vary  greatly  from  day  to  day,  or 
from  week  to  week.  Its  disbursements,  on  the  other 
hand,  are  largely  periodic.  Thus  the  interest  on  the 
public  debt  is  paid  normally  at  quarterly  intervals. 
Pension  payments  figure  largely  in  the  Treasury  pay- 
ments for  one  month,  and  may  not  recur  the  month  fol- 
lowing. If  these  payments  were  relatively  inconsider- 
able, the  contraction  and  expansion  of  the  currency 
which  they  now  occasion  would  be  scarcely  felt.  But 
they  are  not  inconsiderable,  and  when  the  currency  is 
steadily  contracted  by  growing  Treasury  holdings,  and 
then  of  a  sudden  the  accumulation  of  cash  is  poured  out 
into  the  bank  reserves  of  New  York  and  other  large 
cities,  the  disturbance  in  the  money-market  is  often 
keenly  felt.  Exchanges  are  hampered,  and  current  rates 
of  discount  are  increased,  by  the  stringency  which  the 
Treasury's  absorptions  unwittingly  cause.  This  is  es- 
pecially likely  to  occur  in  the  case  of  a  bond  sale,  when 
the  Treasury  within  a  short  period  of  time  absorbs  a 
vast  amount  of  currency  paid  over  to  it  by     the  pur- 


324  POSITION  OF  THE   TREASURY. 

chasers  of  the  bonds.  Here  it  is  the  irregularity  in  re- 
ceipts rather  than  in  payments  which  creates  trouble, 
unless  the  previous  plethora  of  currency  is  such  that 
what  the  Treasury  takes  simply  relieves  the  congestion. 
These  arbitrary  variations  in  the  amount  of  money  in 
circulation  are  bound  to  arise  whenever 'the  govern- 
ment's income  and  outgo  (provided  they  are  relatively 
large  enough  to  affect  appreciably  the  total  circulation) 
do  not  approximately  go  hand  in  hand.  The  difficulty 
may  be  largely  abated  by  timing  disbursements,  even 
by  anticipating  certain  payments  before  they  fall  due, 
in  order  to  prevent  any  undue  disturbance  of  the  money- 
market.  In  the  case  of  bond  sales,  much  of  the  money 
received  by  the  Treasury  may  be  immediately  rede- 
posited  with  the  national  bank  depositories,  provided 
always  that  they  can  furnish  the  bond  security  neces- 
sary for  receiving  federal  money  on  deposit.  The  actual 
cash  in  this  way  will  not  leave  the  bank  vaults  nor  be 
subtracted  from  the  banking  reserve,  and  the  credit 
created  in  favor  of  the  Treasury  will  be  successively 
drawn  upon  until  it  is  quite  expunged.  When  Treasury 
disbursements  exceed  its  receipts,  the  effect  is  to  lessen 
the  Treasury's  cash  and  to  force  back  into  the  channels 
of  general  circulation  not  only  every  dollar  taken  in  by 
way  of  taxes,  but  the  additional  sums  paid  out  of  the 
Treasury's  original  cash  balance.  In  this  case  the  con- 
gestion of  the  money-market  is  made  worse,  and  can 
be  relieved  normally  only  by  the  export  of  coin,  or  by 
the  sale  of  bonds  for  cash. 

The  Banking  Operations  of  the  Treasury. — When  it 
is  said  that  the  Treasury  in  addition  to  gathering  the 
federal  revenues  and  paying  them  out  undertakes  the 
business  of  banking  also,  the  statement  must  be  guarded 
to  prevent  possible  misapprehension.     The  cardinal  du- 


THE  BANKING  OPERATIONS  OF  THE   TREASURY.    3^5 

ties  expected  of  a  banker  are  to  lend  or  advance  upon 
business  paper  or  securities,  to  engage  to  pay  upon  the 
order  of  depositors,  and  to  furnish  a  paper  currencv 
for  the  use  of  the  community.  These  are  the  well- 
known  functions  of  discount,  deposit,  and  issue.^  It  is 
only  the  last  function  which  the  Treasury  undertakes 
on  a  great  scale. 

(a)  Certificates  of  Deposit. — It  is  true  that  the  Treas- 
ury issues  certain  certificates  of  deposit  which  circulate 
as  currency,  amounting  to  five  hundred  million  dollars, 
or  more,  in  the  aggregate,  but  these  certificates  are  an- 
alogous to  warehouse  receipts  rather  than  to  ordinary 
bank  deposits.  The  holders  of  standard  silver  dollars 
may  deposit  them  in  the  Treasury,  and  receive  in  lieu 
thereof  notes  certifying  that  such  or  such  a  number  of 
silver  dollars  have  been  deposited,  and  are  to  be  had 
at  any  time  upon  presentation  of  and  in  redemption  of 
the  certificates.  The  holder  of  the  certificate  is  the 
owner  of  the  coins  which  are  held  at  the  government's 
expense  in  the  Treasury  vaults. ^  In  like  manner  the 
holder  of  gold  coin  may  deposit  it  in  the  Treasury,^ 
and  receive  similar  certificates  of  deposit  analogous  to 
those  Just  described.  Both  the  gold  certificates  and 
silver  certificates  bear  no  interest  and  pass  like  ordi- 
nary currency  from  hand  to  hand.  But  such  deposits 
are  manifestly  very  different  from  ordinary  bank  de- 
posits, where  the  bank  obligates  itself  to  pay  certain 
sums  to  the  order  of  its  depositors,  and  holds  to  meet 
these  liabilities  a  cash  reserve  amounting  to  but  a  frac- 

^  See  C.  F.  Dunbar,  The  Theory  and  History  of  Banking. 

'The  outstanding  amount  of  silver  certificates  (Feb.  25,  1899) 
is  $401,589,504. 

'Except  when  the  gold  reserve  falls  below  $100,000,000.  The 
outstanding  amount  ot  gold  certificates  (Feb.  25,  1 899)  is  $34,609,- 
729.  Neither  the  gold  certificates  nor  the  silver  certificates  are  a 
legal  tender,  although  the  coin  they  command  is  a  legal  tender. 


326  POSITION   OF   THE    TREASURY. 

tion  of  its  total  liabilities.  The  Treasury,  on  the  other 
hand,  holds  the  coins  deposited  as  an  inviolable  reserve 
available  only  for  redeeming  the  certificates  issued.  The 
Treasury,  therefore,  is  asked  to  issue  these  certificates 
of  deposit  rather  because  it  acts  as  a  monetary  ware- 
house which  makes  no  charge  for  storage  than  because 
it  is  engaged  in  deposit  banking.  Indeed  it  would  be 
more  correct  to  say  that  the  Treasury  gratuitously  main- 
tains a  safety  deposit  warehouse  for  standard  coins  than 
to  affirm  that  the  Treasury  undertakes  the  business  of 
deposit  banking  proper.  Through  the  national  bank 
depositories  the  Treasury  provides  credit  balances 
against  which  the  federal  disbursing  officers  draw ;  and 
it  engages,  as  the  redemption  agency  of  the  national 
banks,  to  redeem  in  the  first  instance  national  bank  notes 
presented  for  redemption,  but  these  tasks  are  relatively 
unimportant  in  scope,  and  cannot  be  said  to  alter  essen- 
tially the  contention  that  the  deposit  operations  of  the 
Treasury  are  mainly  because  of  the  Treasury's  posses- 
sion of  a  Strong  vault  and  not  because  of  the  Treasury's 
undertaking  the  risks  of  ordinary  deposit  banking. 

{b)  The  Issue  and  Redemption  of  Cireulatiiii!;  Xoles. — 
The  real  magnitude  of  the  Treasury's  banking  opera- 
tions will  first  appear  when  we  regard  the  vast  amount 
of  demand  notes  it  issues  bearing  no  interest.  These 
notes  circulate  as  currency,  and  for  their  redemption  the 
Treasury  exerts  itself  to  provide  the  requisite  amount 
of  gold  coin.  The  exact  nature  of  this  part  of  the 
Treasury's  work  can  be  understood  only  by  examining 
closely  into  the  character  of  the  notes  in  question. 

First  in  order  comes  the  "  greenback," — or  the  United 
States  note,  as  tne  federal  statutes  more  decorously  term 
it.  Historically,  these  notes  originated  in  the  pressing 
needs  of  the  government  during  the  Civil  War.     Not 


THE  BANKING  OPERATIONS  OF  THE   TREASURY.  32? 

having"  the  coin  to  pay  for  the  supplies  it  required,  the 
government  issued  its  promises  to  pay  coin,  and  en- 
dowed these  promises  with  the  quahty  of  serving  as  a 
legal  tender  in  payment  of  debt.  They  went  readily 
into  circulation,  though  their  purchasing  power  was 
much  less  than  that  of  the  coin  the  government  pledged 
to  pay  to  the  bearer  of  the  note.  When  the  notes  were 
first  issued,  and  indeed  for  many  years  thereafter,  the 
Treasury  made  no  pretence  of  redeeming  the  notes  in 
coin.  The  value  of  the  greenbacks  therefore  constantly 
fluctuated,  depending  on  the  estimate  the  market  put 
upon  the  nearness  or  remoteness  of  their  equivalence  to 
coin.  This  in  turn  was  seen  to  depend  upon  the  number 
of  greenbacks  in  circulation,  the  success  of  the  federal 
arms,  and  various  other  circumstances.  Originally, 
therefore,  the  greenbacks  came  into  being  as  the 
I  O  U's  of  an  impecunious  debtor.  They  circulated 
the  more  readily  because  the  government  took  away  the 
protection  of  law  from  creditors  who  refused  to  accept 
in  satisfaction  of  private  debts  owing  them,  the  tender 
of  the  government's  discredited  promises.  The  total 
amount  authorized  was  in  excess  of  four  hundred  million 
dollars,  and  practically  this  amount  was  outstanding 
when  peace  ensued,  and  the  government  faced  the  dis- 
agreeable necessity  of  paying  its  debts.  The  design  of 
the  originators  of  the  greenback  currency  was  to  provide 
only  a  temporary  expedient  for  staving  off  the  day  of 
actual  payment.  The  notes  were  not  intended  to  consti- 
tute a  permanent  currency,  and,  very  shortly  after  the 
establishment  of  peace.  Congress,  in  one  of  its  occasional 
spasms  of  rhetorical  virtue,  declared  for  the  early  retire- 
ment of  the  greenbacks  and  their  speedy  redemption  in 
coin.  The  Treasury  actually  began  to  cancel  and  de- 
stroy certain  greenbacks  paid  in  on  account   of  taxes. 


328  POSITION  OF   THE   TREASURY. 

But  no  sooner  had  the  process  begun  than  the  shoe 
began  to  pinch.  The  withdrawal  of  a  part  of  the  cur- 
rency through  tliis  destruction  of  greenbacks  produced 
a  fceHng  of  stringency  in  the  money-market.  The 
Treasury,  in  consequence  was  prohiljited  from  pursuing 
the  pohcy  of  destroying  these  evidences  of  the  govern- 
ment's indebtedness,  and  at  a  subsequent  period  ^  even 
threw  back  needlessly  into  circulation  many  millions  of 
the  greenbacks  that  stood  uncancelled  in  the  Treasury 
vaults.  The  currency  that  we  had  at  first  endured  as  a 
military  necessity  we  began  to  embrace  as  permanent 
currency ;  and  these  evidences  of  national  insolvency 
were  invested  with  the  halo  of  patriotism,  as  the  "  blood- 
stained greenbacks"  became  the  battle-cry  of  those  whose 
interests  led  them  to  deprecate  the  contraction  of  the  cur- 
rency and  to  oppose  an  immediate  return  to  specie  pay- 
ments. The  Resumption  Act,  which  was  finally  passed 
January  14, 1875,  authorized  the  Secretary  of  the  Treasury 
to  sell  bonds  in  order  to  accumulate  coin  "to  prepare  and 
provide  for  the  redemption  "  of  the  greenbacks.  This 
policy  of  redemption  in  gold  coin  upon  the  holder's  de- 
mand was  successfully  inaugurated  January  i,  1879,  and 
ever  since  has  been  continued.  But  most  curiously,  and 
as  if  to  illustrate  the  tenacity  of  an  inconvertible  cur- 
rency's power  for  evil.  Congress  by  Act  of  May  31, 
1878,  prohibited  the  Treasury  thereafter  from  cancelling 
or  destroying  ^  any  of  the  then  outstanding  greenbacks, 
even  though  redeemed  in  gold,  and  required  that  such 
notes  as  were  paid  into  or  redeemed  by  the  Treasury 

'  For  the  history  of  these  transactions  consult  Noyes,  Thirty 
Years  of  American  Finance;  Bolles,  The  Financial  History  of 
the  United  States,  Vol.  III. 

"  Worn  or  torn  notes  may  be  cancelled  and  destroyed,  but 
must  be  replaced  by  new  notes  to  the  same  amount.  The  exact 
greenback  circulation  is  $346,681,016. 


THE  BANKING  OPERATIONS  OF  THE  TREASURY.     329 

should  be  reissued.  The  amount  of  greenbacks  existing 
at  the  time  of  the  passage  of  this  act  was  about 
$346,000,000,  and  has  remained  at  that  figure  ever  since. 
Here,  then,  is  the  first  part  of  the  Treasury's  gigantic 
task  as  a  bank  of  issue,  to  keep  in  existence  at  ah  times 
and  under  all  circumstances  its  promissory  notes  to  an 
amount  of  $346,000,000,  and  to  redeem  any  or  all  of 
such  notes  in  coin  (practically  gold  coin)  at  the  demand 
of  the  note  holder.  The  expedients  for  obtaining  the 
coin  required  for  redemption  purposes  may  be  discussed 
more  advantageously  after  w^e  have  described  the  next 
class  of  Treasury  obhgations. 

As  though  the  responsibilities  resting  upon  the  Treas- 
ury were  not  already  heavy  enough,  Congress  by  Act 
of  July  14,  1890,  required  the  Treasury  to  purchase 
4,500,000  ounces  of  silver  monthly,  and  for  the  bullion 
so  purchased  to  turn  over  to  the  sellers  of  silver  bullion 
what  were  termed  Treasury  Notes  or  Coin  Notes. 
The  measure  in  question  was  a  compromise  between 
the  advocates  and  opponents  of  a  more  extended 
use  of  silver  money,  and  the  law  was  commonly 
known  as  the  Sherman  Law,  inasmuch  as  Senator  Sher- 
man was  the  chairman  of  the  Senate  committee  which 
evolved  the  measure.'^  These  monthly  purchases  of 
silver  bullion  continued  until  the  fall  of  1893,  when  the 
purchase  clause  of  the  act  was  repealed  (November  i, 
1893).  The  notes  which  the  Treasury  issued  to  acquire 
the  bullion  purport  to  be  redeemable  upon  demand  in 
"  coin,"  and  the  law  ostensibly  confers  upon  the  Secre- 
tary of  the  Treasury  the  option  of  redeeming  the  notes 
in  gold  or  silver  coin  as  he  may  elect.  The  notes  are 
also  made  a  legal  tender  in  payment    of  debt.      If  re- 

'The  notes  issued   by  virtue  of  tlie  act   are   often   termed 
Sherman  notes  as  well  as  Coin  or  Treasury  notes. 


330  POSITION  OF   THE    TREASURY. 

deemed  in  gold,  they  must  be  reissued.  If  redeemed 
in  silver,  they  must  be  cancelled.'  In  j^ractice  the  op- 
tion conferred  upon  the  Secretary  of  the  Treasury  to 
redeem  them  in  either  gold  or  silver  has  proved  nuga- 
tory. Their  holders  ordinarily  ask  for  gold,  and  the 
Treasury  accedes,  fearful  that  a  refusal  would  destroy 
the  ecpial  purchasing  power  of  gold  and  silver  currency. 
Substantially,  then,  the  Shernian  law  has  compelled  the 
Treasury  to  assume  an  enormous  liability  for  about  a 
hundred  million  dollars  additional  in  the  shape  of  cir- 
culating demand  notes,  redeemable  dc  facto  in  gold,  and 
only  slightly  contractile  in  volume. 

Notwithstanding  the  different  historical  origin  o\  the 
greenback  and  the  Treasury  note,  and  certain  unessen- 
tial variations  in  their  legal  attributes,  they  arc  best  re- 
garded for  many  purposes  as  a  practically  homogeneous 
block  of  government  obligations,  amounting  in  all  to 
nearly  five  hundred  millions  of  dollars.  Both  are 
promissory  notes  of  the  government.  Both  circulate  as 
currency.  Both  are  a  legal  tender.  Both  are  redeem- 
able on  demand,  and  practically  in  gold  coin.  When  so 
redeemed  neither  can  be  retired,  but  both  must  be  re- 
issued. To  all  intents  and  purposes  the  greenbacks  and 
the  Treasury  notes  constitute  a  practically  irreducible 
quantum  of  government  obligations  payable  on  demand 
in  gold.  We  must  next  inquire  into  the  methods  by 
which  the  Treasury  obtains  the  gold  for  redeeming  the 
legal  tender  notes.^ 

'  The  silver  coin  with  which  they  are  redeemed  may  be 
deposited  in  the  Treasury,  and  silver  certificates  obtained  in 
exchange.  In  this  way  some  millions  of  Treasury  notes  have 
been  transformed  circuitously  into  silver  certificates.  But  gen- 
erally the  Coin  notes  arc  redeemed  in  gold  and  reissued.  The 
amount  of  Coin  notes  Feb.  25,  1899,  was  feS-SZ/./^o. 

•  Legal  tender  notes  is  a  convenient  caption  for  designating 
both  the  greenbacks  and  the  Coin  notes,  as  they  alone  of  all  our 
paper  currency  possess  full  legal  tender  attributes. 


THE  BANKING  OPERATIONS  OF   THE   TREASURY.    331 

When  the  government  in  1879  began  again  the  re- 
demption of  its  demand  notes  in  specie,  the  stock  of 
gold  held  for  that  purpose  had  been  accumulated  by  the 
sale  of  bonds  authorized  in  the  Resumption  Act  of  1875. 
Secretary  Sherman  in  1878  obtained  about  $100,000,000 
in  gold  coin  with  which  to  redeem  on  presentation  any 
of  the  outstanding  $346,000,000  of  greenbacks.  The 
Resumption  Act  did  not  designate  any  specific  amount 
of  gold  to  constitute  "  the  gold  reserve."  The  only 
statutory  mention  of  what  has  become  known  as  "  the 
gold  reserve  "  is  found  in  an  act  passed  in  1882  which 
forbade  the  issue  of  additional  gold  certificates  ^  when 
the  free  or  net  gold  in  the  Treasury  should  be 
below  $100,000,000.  The  traditional  gold  reserve  of 
$100,000,000,  fixed  upon  by  commercial  consent  as  a 
sort  of  '  apprehension  minimum,'  and  only  incidentally 
mentioned  by  a  later  statute,  had  its  origin,  therefore, 
in  custom  pure  and  simple,  and  became  a  substantive 
entity  merely  by  the  long-continued  practice  of  the 
Treasury  to  carry  at  least  that  amount  of  gold  coin  as  a 
reserve  held  against  the  legal  tender  notes.^ 

The  Resumption  Act  of  1875,  which  in  many  respects 
is  entitled  to  be  regarded  as  one  of  the  pillars  of  our 
entire  financial  system,  does  not  limit  the  amount  of 
bonds  which  the  Secretary  of  the  Treasury  may  issue  to 
obtain  the  coin  necessary  for  redemption  purposes,  nor 
apparently  does  it  limit  the  time  during  which  the  Sec- 
retary may  exercise  this  power.  Under  the  authority 
which  the  act  confers,  the  Secretary  of  the  Treasury  on 
four  occasions  within  the  last  few  years  has  sold  bonds 
to  replenish  his  stock  of  gold  coin.     Besides  building 

\Stt  p.  325. 

'The  gold  coin  in  tl.-  United  States  amounts  to  about 
$825,000,000.  Manifestly,  the  Treasury  holds  only  a  part  of  the 
whole. 


332  POSITION   OF   THE    TREASURY. 

Up  the  gold  reserve  by  the  sale  of  bonds,  the  Treasury  in 
normal  times  acquires  gold  through  several  less  costly 
processes.  Customs  duties  are  by  law  payable  in  gold, 
and  though  it  would  be  futile  for  the  customs  officials 
to  refuse  to  accept  legal  tender  notes  in  payment 
of  customs  duties  (inasmuch  as  legal  tender  notes  are 
convertible  on  demand  into  gold),  a  certain  percentage 
of  the  customs  receipts  is  normally  paid  in  gold  when- 
ever the  amount  of  circulating  notes  afloat  is  not  so  great 
as  to  flood  the  channels  of  exchange  and  displace  gold 
in  payments  to  the  government.  ]\Ioreover,  on  more 
than  one  occasion  the  Treasury  has  increased  its  gold 
holdings  by  offering  to  pay  out  at  distant  sub-treasuries 
paper  currency,  in  exchange  for  gold  voluntarily  turned 
over  to  the  Sub-Treasury  in  New  York  City.  This  has 
amounted  practically  to  a  voluntary  exchange  by  the 
Treasury  of  its  paper  currency  for  the  gold  of  private 
citizens.  The  latter  have  agreed  to  the  exchange,  be- 
cause it  saved  them  the  trouble  and  expense  of  shipping 
currency  to  distant  points  to  which  they  desired  to  make 
remittances.  The  Treasury,  moreover,  is  generally  will- 
ing to  make  a  voluntary  exchange  of  any  of  the  paper 
currency  or  silver  dollars  in  its  own  cash  for  equivalent 
amounts  of  gold  coin.i 

Before  the  total  liabilities  of  the  Treasury  can  be  justly 

*  Besides  the  redemption  of  gold  and  silver  certificates  and 
of  legal  tender  notes,  the  Treasury  undertakes  various  other 
minor  exchanges  of  certain  kinds  of  currency  for  other  kinds. 
Thus  small  change  may  be  had  in  exchange  for  bills,  and.  con- 
versely, bills  may  be  had  for  small  change.  Torn.  worn,  or 
soiled  notes  are  exchanged  at  the  Treasury  for  new  notes  of  the 
same  denomination.  Bankers  often  deposit  legal  tender  notes 
in  blocks  of  $5000  or  multiples  thereof  and  receive  in  exchane-e, 
currency  certificates  for  equivalent  amounts.  The  small  notes 
so  deposited  in  the  Treasury  are  kept  as  a  special  deposit  and 
are  given  back  upon  the  surrender  of  the  currency  certificates. 
There  is  no  law  which  compels  the  Treasury  to  give  gold  coin 
in  exchange  for  silver  dollars. 


THE  BANKING  OPERATIONS  OF  THE  TREASURY.    333 

estimated,  reference  must  be  made  to  still  another  kind 
of  paper  currency,  to  wit,  the  circulating  notes  issued  by 
the  national  banks.  Before  issuing  their  notes,  the 
national  banking  associations  are  required  to  deposit 
in  the  Treasury,  United  States  bonds  as  security  to  in- 
demnify the  note-holder  should  the  bank  fail.  These 
bonds  remain  the  property  of  the  banks,  which  receive 
the  interest  thereon  as  it  accrues.  Upon  the  deposit  of 
bonds,  notes  in  blank  are  issued  to  the  national  banks 
amounting  to  ninety  per  cent,  of  the  par  value  of  the 
bonds  deposited.  These  notes  when  countersigned  by 
the  president  and  cashier  of  the  issuing  bank,  are  paid 
out  over  the  bank's  counter  and  become  a  constituent 
element  in  our  heterogeneous  currency.  They  are  re- 
deemable "  in  lawful  money "  at  the  issuing  bank, 
though  it  is  safe  to  say  that  few,  if  any,  national  bank 
notes  are  thus  presented  for  redemption.  They  are  also 
redeemable  at  the  Treasury  at  Washington,  which  serves 
as  a  central  redemption  agency  for  the  notes  in  question. 
Each  bank  must  keep  on  deposit  with  the  Treasury  five 
per  cent,  in  lawful  money  of  its  note  circulation.  The 
banks  may  increase  their  note  circulation  by  the  deposit 
of  additional  bonds  as  security.  They  may  reduce  their 
circulation  in  whole  or  part  by  depositing  with  the 
Treasury  an  amount  in  lawful  money  equal  to  the  out- 
standing note  issue  they  desire  to  withdraw.  The  ex- 
pansion and  contraction  of  the  national  bank-note  cir- 
culation is  hampered  by  provisions  limiting  the  aggre- 
gate amount  that  maybe  retired  to  $3,000,000  per  month  ; 
also  by  provisions  forbidding  any  bank  reducing  its  cir- 
culation to  increase  its  circulation  again  within  a  period 
of  six  months.  The  Treasury  as  a  central  redemption 
bureau  manages,  though  somewhat  slowly,  to  withdraw 
notes  of  banks  reducing  their  circulation,  and  serves  to 


334  POSITION  OF   THE    TREASURY. 

replace  worn  and  soiled  notes  with  fresh  ones  ;  but 
inasmuch  as  national  bank-notes  on  the  average  are  not 
presented  for  redemption  in  lawful  money  more  than 
once  in  three  years,  their  instant  convertibility  into  coin 
at  any  and  all  times  has  never  been  very  cogently 
demonstrated.  The  national  bank-note  circulation  is 
in  truth  a  rather  torpid  and  immobile  part  of  our  com- 
posite currency.  Its  increase  depends  on  a  calculation 
of  the  possible  profit  to  be  obtained  by  the  banks  in 
lending  additional  amounts  of  their  own  notes.  Such  a 
possibility  of  profit  by  the  national  banks  in  a  particular 
section  of  the  country  is  no  conclusive  evidence  that  the 
country  as  a  whole  stands  in  any  need  of  an  increase 
in  its  circulating  media.  Similarly,  national  banks  may 
retire  their  circulation,  for  instance,  to  obtain  possession 
of  the  bonds  deposited  as  note  security,  when  an  actual 
need  of  increased  currency  is  felt.  Certainly  the  re- 
sponsiveness of  the  national  bank  circulation  to  varia- 
tions in  the  need  felt  for  currency  is  slow,  and  only 
evident  when  the  need  is  widespread  and  unmistakable. 
The  Treasury,  then,  in  addition  to  the  other  manifold 
obligations  resting  upon  it,  stands  as  a  sort  of  sponsor 
for  the  circulating  notes  of  the  national  banks.  Al- 
though unable  to  exert  any  direct  control  over  their 
volume,  the  Treasury  undertakes  to  redeem  such  notes; 
and  although  the  banks  are  required  to  keep  a  five  per 
cent,  redemption  fund  with  the  Treasury  for  this  pur- 
pose, and  are  required  to  make  good  all  of  their  notes 
which  the  Treasury  has  first  redeemed,  the  fact  remains 
that  the  national  bank  circulation  constitutes  a  huge 
bulk  of  obligations,  all  of  which  are  redeemable  in 
lawful  money  which,  in  turn,  so  far  as  it  consists  of  legal 
tender  notes,  is  ultimately  a  lien  upon  the  Treasury's 
gold  reserve.' 

'The    national    baiik-noLcs   are    noL    u    Ic-gal    lender,    though 


THE  BANKING   OPERATIONS   OF   THE   TREASURY.    2>ij 

The  liabilities  of  the  Treasury  on  account  of  our  paper 
currency  can  now  be  estimated  with  some  degree  of  ac- 
curacy. First,  come  about  $450,000,000  in  legal  tender 
notes,  practically  irreducible  in  volume,  redeemable  ac- 
cording to  Treasury  practice  on  demand  in  gold  coin 
and  resting  wholly  on  the  gold  reserve.  Next,  come 
about  $250,000,000  in  national  bank-notes  whose  vol- 
ume, though  not  rigid,  cannot  be  reduced  by  the  Treas- 
ury, and  which  are  capable  of  being  used  in  a  roundabout 
fashion  so  as  to  be  a  second  claim  upon  the  govern- 
ment's gold  reserve.  Lastly,  come  the  gold  and  silver 
certificates  amounting  to  $440,000,000  approximately,  of 
which  the  first  can  occasion  no  trouble,  as  there  stands 
behind  it  a  reserve  of  dollar  for  dollar  in  gold.^  But  the 
silver  certificates,  though  backed  by  an  equal  reserve 
in  silver  dollars,  are  likely  to  prove  troublesome, 
inasmuch  as  the  standard  silver  dollars  have  only  about 
half  of  the  bullion  value  of  the  gold  dollar,  so  that  but 
few  of  the  silver  certificates  are  presented  for  redemption 
in  silver;  and  though  there  is  no  express  statute  com- 
pelling the  Treasury  to  redeem  silver  certificates  in  gold, 
the  Treasury  has  intimated  its  determination  to  do  so, 
in  case  the  refusal  to  redeem  the  silver  certificates  in 
gold  would  imperil  the  equivalence  of  the  purchasing 

they  are  received  by  the  Treasury  for  all  dues  except  customs, 
and  are  used  by  the  Treasury  in  all  payments  except  interest 
on  the  public  debt.  The  amount  outstanding  Jan.  i,  1899,  was 
$243,735,105,  of  which  amount  $214,016,088  are  secured  by  bonds 
deposited,  while  the  remainder  is  in  process  of  extinction,  the 
banks  having  withdrawn  their  bonds  and  substituted  lawful 
currency  to  the  amount  of  the  notes.  Such  notes  are  not 
actually  retired  and  cancelled  until  paid  into  the  Treasury  through 
the  ordinary  tax  channels,  though  the  bank's  obligations,  so  far 
as  the  notes  go,  cease  With  the  deposit  of  lawful  money  in  the 
Treasury. 

'  The  gold  reserved  to  cash  gold  certificates  is  not  a  part 
of  the  gold  reserve.  It  amounted  (Feb.  25,  1899)  to  $34,609,729. 
The  silver  certificates  amounted  (Feb.  25,  1899)  to  $401,589,504. 


336  POSITION  OF  THE   TREASURY. 

or  debt-payinf^  power  of  gold  and  silver  dollars.*  The 
silver  dollars  upon  which  the  silver  certificates  were  is- 
sued, stand  therefore  as  a  sort  of  unavailable  banking 
asset,  whose  chief  influence  is  to  prevent  the  silver  cer- 
tificate in  any  case  from  dropping  in  value  below  the 
bullion  value  of  the  coin  on  which  it  was  originally 
based.  In  the  last  analysis,  then,  the  matter  comes  to 
this :  there  are  outstanding  demand  notes  amounting  to 
over  a  thousand  million  dollars  which  the  Treasury  in 
practice  holds  itself  ready  directly  or  mediately  to  re- 
deem on  demand  in  gold.  The  gold  available  for  this 
purpose  can  readily  be  obtained  in  times  of  industrial 
activity  and  brisk  monetary  circulation  from  customs 
receipts  and  through  exclianges  made  by  individuals 
who  voluntarily  part  with  their  gold  for  various  kinds 
of  paper  currency.  But  this  easy  and  economical  main- 
tenance of  the  gold  reserve  ceases  whenever  the  Treas- 
ury for  any  considerable  period  and  to  any  considerable 
extent  pays  out  more  money  than  it  concurrently  takes 
in.  The  Treasury's  gold  reserve  in  this  case  is  poured 
out  to  meet  current  expenses, and  is  reduced  accordingly. 
If  the  channels  of  circulation  are  filled  with  paper  cur- 
rency, the  gold  receipts  from  customs  dwindle  or  dis- 
appear. Instead  of  individuals  seeking  voluntarily  to 
exchange  their  gold  for  paper  currency,  legal  tender 
notes  are  presented  for  redemption  in  gold,  either  be- 
cause the  gold  is  wanted  for  export  to  pay  foreign  credit- 
ors, or  because  the  continued  solvency  of  the  Treasury 
is  questioned,  and  gold,  in  consequence,  is  hoarded.     In 


*  "  Even  further  than  this,  it  in-e.,  the  Treasury")]  has  declared 
itself  ready,  whenever  nrcessary  to  the  maintenance  of  this 
parity,  to  exchans^e  on  even  terms,  at  the  pleasure  of  the  holder, 
either  form  of  the  metallic  money  for  the  other." — Report  of 
the  Secretary  of  the  Treasury,  18^7,  p.  IxxH, 


THE  BANKING   OPERATIONS   OF   THE   TREASURY.     337 

this  exigency  there  is  no  alternative  but  to  issue  bonds 
to  obtain  additional  gold. 

The  peculiar  feature  of  the  constitution  of  the  Treas- 
ury does  not  consist  merely  in  the  vast  bulk  of  demand 
obligations  it  continuously  floats,  nor  in  the  Treasury's 
inability  to  lessen  materially  the  bulk  of  these  obliga- 
tions, even  when  they  are  once  redeemed,  nor  yet  in  the 
precarious  and  clumsy  method  of  obtaining  gold  for  re- 
demption purposes  in  time  of  stress ;  ^  but  the  singular 
the  unique,  part  of  the  Treasury's  task  is  the  requirement 
laid  upon  it  of  conducting  at  the  same  time  an  enormous 
fiscal  bureau  and  an  enormous  bank  of  issue,  and  using 
the  assets  of  the  tzuo  concerns  as  interchangeable.  Gold 
received  in  customs  payment  is  frequently  used  to  re- 
deem legal  tender  notes.  Gold  received  from  bond  sales 
(made  ostensibly  for  acquiring  gold  to  redeem  legal 
tenders)  is  used  for  paying  current  expenses.  Thus  a 
deficit  in  ordinary  revenue,  if  considerable,  may  deplete 
the  gold  reserve  and  necessitate  an  increase  in  the  funded 
debt ;  while  surplus  revenues,  by  temporarily  locking  up 
money  in  the  Treasury,  increase  the  percentage  of  the 
Treasury's  gold  receipts,  and  automatically  enlarge  the 
gold  holdings  available  for  its  banking  reserve. 

A  deficit  in  revenue  undermines  the  banking  reserve, 
shakes  confidence  in  the  Treasury's  solvency,  and  neces- 
sitates an  increase  in  future  taxation  to  meet  the  in- 
terest on  the  increased  funded  debt.  An  ample  banking 
reserve,  on  the  other  hand,  can,  under  present  circum- 
stances, be  assured  only  by  a  wasteful  system  of  taxa- 
tion that  takes  out  of  the  pockets  of  the  people  more 
than  the  needs  of  the  government  require.  Such  a  sur- 
plus of  revenue,  moreover,  not  infrequently  produces  a 

'The  bonds  that  may  be  issued  under  the  Resumption  Act 
of  1875  '^"'^  ^°''  '^^"f  fifteen,  or  thirty  year§, 


33^  POSITION  Oh    THE   TREASURY. 

dearth  in  the  money-market  just  when  booming  trade 
stands  in  need  of  a  plentiful  currency  to  effect  its  ex- 
changes.^ 

It  would  not  lie  within  the  scope  of  this  work  to  sketch 
any  project  for  reconstituting-  the  Treasury  and  the  na- 
tional banking  system.  Most  unbiassed  critics  admit 
the  necessity  of  separating  the  fiscal  from  the  banking 
operations  of  the  Treasury.  This  at  least  would  let  u- 
know  approximately  the  cost  of  each, — a  fact  now  !  ope- 
lessly  beclouded.  It  would  also  i)revent  political  lyros 
from  ascribing  all  our  financial  ills  either  to  a  revenue 
deficit  exclusively  or  to  note  redemption  exclusively. 
This  in  itself  would  be  no  small  gain.  Beyond  this 
separation  of  the  two  generic  operations  of  the  Treasury, 
some  method  of  reducing  the  Treasury's  demand  obli- 
gations, either  by  funding  some  of  the  existing  demand 
notes,  or  by  converting  them  into  what  practically  would 
be  gold  certificates,  seems  highly  advisable.  The  latter 
plan  would  provide  that  greenbacks,  for  instance,  once 
redeemed  in  gold,  should  be  corralled  in  the  Treasury, 
and  thereafter  issued  only  in  exchange  for  an  ecjual  de- 
posit of  gold  coin,  the  coin  to  be  held  as  an  inviolable 
deposit  for  the  future  redemption  of  these  notes.  To 
prevent    a    contraction    of    the    currency    from    arising 

*  Incidental  to  the  Treasury's  position  as  a  great  bank  of  issue 
are  the  special  functions  it  is  expected  to  perform  in  times  of 
monetary  stringency.  Clamor  arises  for  unusual  disbursements, 
for  anticipating  interest  payments  on  the  public  debt,  or  for  the 
purchase  of  the  debt  outright  in  the  open  market  in  order  to 
relieve  the  stress.  Even  in  ordinary  times  when  government 
receipts  are  unusually  large,  as  in  July  1898, — from  recent  bond 
sales, — the  Treasury  exerted  itself  to  keep  its  accruing  cash  largely 
in  national  bank  depositories  lest  a  "  currency  famine  "  should 
prevail.  Those  who  disbelieve  in  government  banking  find  ad- 
ditional reason  for  their  position  in  the  inability  of  the  Treasury 
to  perform  this  additional  work  of  keeping  the  money  market 
properly  provided  with  currency.  When  trade  is  slack  and  the 
Treasury  pays  out  all  it  receives  and  even  trenches  on  its  gold 
reserve  to  make  ordinary  payments,  the  Treasury  i§  reviled  for 
"  demoralizing  "  the  money  market. 


CONCLUDING  REMARKS  ON  THE  MONETARY  SYSTEM.    339 

through  such  reforms,  and  to  introduce  greater  elas- 
ticity into  the  note  circulation,  various  projects  for  al- 
lowing banks  to  issue  notes  in  part,  at  least,  unsecured 
by  any  specific  deposit  of  bonds,  and  redeemable  in  prac- 
tice as  well  as  theory  at  the  bank  of  issue,  have  been 
mooted.^ 

Concluding  Remarks  on  the  Monetary  System. — The 
real  character  of  our  monetary  system  as  it  exists  to-da . 
is  often,  indeed  usually,  beclouded  by  dragging  into  its 
discussion  some  phase  of  the  free  silver  issvie  or  ii^- 
more  reputable  but  distant  and  possibly  defunct  relative, 
international  bimetallism.  If  free  silver  coinage  ever 
prevails,  its  advent  will  undoubtedly  revolutionize  the 
present  system,  but  until  that  time  arrives  we  may  find 
it  worth  our  while  in  the  domain  of  finance  to  see  things 
as  they  really  are.  Whatever  we  may  think  about  whaL 
might,  could,  would,  or  should  exist,  the  fundamental 
monetary  fact  of  most  far-reaching  importance  is  that 
23.2  grains  of  pure  gold  is  the  basis  at  the  present  time 
of  all  our  commercial  obligations.  This  is  not  meant, 
of  course,  to  imply  that  a  "  gold  clause  "  2  is  embodied 
in  the  usual  business  contract,  but  that,  for  one  cause  or 
another,  all  dollars  are  alike  in  having  practically  the 
same  purchasing  and  debt-paying  power.  In  other 
words,  the  most  striking  feature  in  our  monetary  system 
is  the  gold  basis  of  commercial  obligations  and  the 
parity  of  all  dollars  with  each  other.  This  fact,  so  univer- 
sally patent,  apparently  so  simple,  and  to  industrial  in- 

^  For  a  summary  of  such  projects  see  article,  The  Objects 
and  Methods  of  Currency  Reform,  by  F.  M.  Taylor,  Quarterly 
Journal  of  Economics,  April  1898. 

^  When  the  continuance  of  gold  payments  by  the  Treasury 
was  in  doubt,  commercial  contracts  frequently  embodied  a 
"  gold  clause  "  whereby  the  debtor  bound  himself  not  merely  to 
pay  "  dollars,"  but  specifically  agreed  to  pay  gold  dollars  of  the 
standard  weight  and  fineness. 


340  POSITION  OF  THE   TREASURY. 

terests  so  gratifying,  we  are  apt  to  assume  must  rest  upon 
some  equally  simple  foundation.  It  will  be  found  upon 
inquiry,  however,  to  rest,  not  on  a  single  substructure, 
but  on  several.  These  ought  to  be  clearly  distinguished 
in  our  apprehension  of  the  matter,  if  we  are  to  under- 
stand thoroughly  all  the  conditions  upon  which  the  per- 
manence of  a  universal  gold  basis  of  commercial  obliga- 
tions depends. 

There  are  but  two  generic  reasons  why  dollars  of  less 
mtrinsic  value  than  gold  dollars  obtain  eciual  purcliasing 
power  with   the  latter.     If  the  dollars   of  less   intrinsic 
value  are  speedily  convertible  into  gold  on  d^ma^ul,  dol- 
lar for  dollar,  their  equivalence  to  gold  in  purchasing 
power  is  readily  understood.     It  makes   no   difference 
whether  or  not  there  be  gold  enough  to  redeem  the  other 
dollars,  if  they  were  all  presented  at  one  time.    So  long  as 
there   is   maintained    sufficient   gold    for   all    exchanges 
likely  to  be  asked  for,  the  parity  of  the  gold  dollars  and 
the  other  dollars  will  continue.     But  the  parity  of  gold 
dollars  and  other  dollars  may  be  maintained  in  one  set 
of   circumstances   even    without    concrete   exchanges   of 
the  one  for  the  other.     If  there  be  a  general  creditor 
of  the  dollar-using  community  who  will  receive  gold  dol- 
lars and  other  dollars  as  precisely  equivalent  in  pavmeits 
made  to  him,  and  if  these  payments  be  large  in  amount 
and   regularly   recurring   from   day   to   day,   and   if   the 
amount  outstanding  of  the  less  intrinsically  valuable  dol- 
lars be  no  greater  than  to  necessitate  tlieir  payment  fre- 
quently to  the  general  creditor,  there  is  no  mystery  about 
the  readiness  of  the  community  to  regard  all  dollars  as 
equivalent.      The  Treasury  is  such  a  general  creditor. 
The  payments  due   it  are  the  hundreds   of  millions  of 
taxes  it  regularly  exacts.     Its  direct  redemption  in  gold 
of  legal  tender  notes,  coupled  with  its  ready  acceptance 


CONCLUDING  REMARKS  ON  THE  MONETARY  SYSTEM.    341 

of  silver  currency  (whose  volume  is  virtually  fixed  ^), 
and  back  of  all,  its  pledge  2  to  exchange  one  kind  of  cur- 
rency for  another  if  necessary,  suffice  to  maintain  the 
parity  of  all  kinds  of  currency  at  the  present  time.  So 
far,  then,  as  the  gold  standard  and  the  parity  of  all  kinds 
of  currenc}^  depend  on  legislation,  it  is  manifest  that  they 
rest  on  the  Resumption  Act  of  1875,  which  provides  for 
bond  sales  when  the  necessity  arises  of  obtaining  addi- 
tional gold  to  redeem  the  legal  tender  notes.  But  the 
gold  standard  and  the  parity  of  all  kinds  of  currency 
rest  not  only  on  the  positive  provisions  of  this  statute, 
but  equally  upon  the  absence  of  statutory  enactments 
which  would  countenance  a  dangerous  increase  of  the 
currency  which  either  directly  or  indirectly  would  have 
to  be  maintained  by  the  Treasury's  gold  reserve.  In 
short,  the  power  to  issue  and  sell  bonds  granted  by  the 
Resumption  Act  is  a  clumsy  but  more  or  less  efifective 
way  not  only  of  providing  the  Treasury  wnth  the  needed 
gold  for  actual  redemption  purposes,  but  of  contracting 
temporarily  the  outstanding  demand  obligations  of  the 
Treasury.  These  demand  liabilities,  for  a  time  at  least, 
are  held  out  of  circulation,  inasmuch  as  not  all  of  the 
notes  which  have  been  redeemed  are  at  once  required 
for  meeting  immediate  expenditures.  Manifestly,  the 
effectiveness  of  this  expedient  would  be  lessened  and 
even  destroyed  if  the  Treasury's  liabilities  were  in- 
creased indefinitely. 

No  less  important  than  the  Resumption  Act  itself  is 

^  Silver  is  no  longer  purchased  by  the  Treasury  except  in 
limited  amounts  for  the  coinage  of  fractional  silver.  Section 
34  of  the  War  Revenue  Tax  of  1898  directs  that  at  least  one 
and  one-half  millions  of  the  uncoined  bullion  purchased  under 
the  Act  of  July  14.  1890.  be  coined  monthly,  and  that  "  said 
dollars,  when  so  coined,  shall  be  used  and  applied  in  the  manner 
and  for  the  purposes  named  in  said  Act." 

'  See  p.  336,  note. 


34«  POSITION   OF   THE    TREASURY. 

the  administrative  practice  of  the  Treasury  in  construing 
"  coin  "  to  mean  gold  in  case  the  government's  creditor 
asks  for  gold.  The  point  is  well  illustrated  in  the  mat- 
ter of  the  Coin  notes.  Here  the  Secretary  of  the  Treas- 
ury is  explicitly  given  the  option  of  redeeming  such 
notes  in  gold  or  silver.  As  a  matter  of  fact,  the  holders 
of  the  Coin  notes  have  obtained  gold  in  exchange  for 
them  whenever  they  have  demanded  it.  It  is  true  that 
the  Act  of  July  14,  1890,  after  providing  that  the  Secre- 
tary of  the  Treasury  shall  "  redeem  such  notes  in  gold 
and  silver  coin  at  his  discretion,"  adds  the  phrase,  "  it 
being  the  established  policy  of  the  United  States  to 
maintain  the  two  metals  on  a  parity  with  each  other 
upon  the  present  legal  ratio,  or  such  ratio  as  may  be 
provided  by  law."  But  it  can  hardly  be  asserted  that 
the  concluding  clause  would  prevent  a  Secretary  of  the 
Treasury  who  was  so  disposed  from  redeeming  Coin 
notes  in  silver.  The  clause  quoted  above  which  has  so 
often  been  invoked  as  the  warrant  for  redeeming  Coin 
notes  on  demand  in  gold  might  easily  be  regarded  as 
hrutum  fulmen  by  a  Secretary  who  wanted  to  "  do  some- 
thing for  silver."  That  such  redemptions  in  silver  might 
destroy  the  parity  of  different  kinds  of  currency  is  not  un- 
likely. That  such  a  result  would  be  disastrous  is  highly 
probable.  That  the  Treasury  is  to  be  commended  for 
resigning  its  legal  option  in  the  matter  is  granted.  But 
the  point  made  is  that  the  continued  parity  of  all  kinds 
of  currency  with  each  other  may  under  certain  circum- 
stances be  destroyed  without  color  of  illegality  by  a 
change  in  Treasury  practice,  without  adding  or  altering 
a  line  in  the  statute-book. 

The  gold  standard  and  the  parity  of  all  forms  of  cur- 
rency are  maintained  by  virtue  of  the  Resumption  Act 
and    by    an    administrative    practice    of    understanding 


CONCLUDING  REMARKS  ON  Th£  MONETARY  SYSTEM.  2>A:S 

"  coin  "  to  mean  gold  coin  rather  than  silver.  If  either 
the  law  or  the  practice  were  radically  changed,  our 
money  system  might  be  revolutionized.  But  there  is 
btill  a  third  set  of  conditions  which  may  be  powerful 
enough  to  counteract  both  statute  law  and  the  canons  of 
Treasury  interpretation.  These  are  those  general  indus- 
trial conditions  which  determine  the  general  price  level. 
Let  the  general  price  level  in  the  United  States  rise 
markedly  and  steadily,  and  bring  with  it  the  necessity 
for  more  currency  to  transact  exchanges,  to  such  an  ex- 
tent that  gold  is  imported  from  abroad,  and  the  gold 
standard  and  the  parity  of  all  forms  of  currency  would 
persist  even  though  the  Resumption  Act  were  non- 
existent and  Coin  notes  were  cashed  only  in  silver  dol- 
lars. Let  the  general  price  level  fall,  exchanges  dwindle, 
and  the  currency  become  redundant,  and  both  the  exer- 
cise of  the  power  conferred  by  the  Resumption  Act  as 
well  as  the  Treasury's  promise  of  exchanging  gold  for 
any  and  all  other  kinds  of  currency  will  be  necessary 
to  maintain  the  gold  basis  of  commercial  obligations 
and  the  parity  of  all  kinds  of  money.  Our  monetary 
system,  therefore,  in  its  essence — the  single  gold  stan- 
dard and  the  equal  purchasing  power  of  all  our  standard 
coins  and  our  paper  currency — depends  on  three  sets  of 
conditions,  statutory,  administrative,  and  commercial. 
These  conditions  may  operate  in  the  same  or  in  opposite 
directions.  The  last,  the  most  powerful  of  the  three — 
the  general  price  level — is  least  under  governmental 
control.  Its  coming  cannot  be  predicted,  nor  its  perma- 
nence calculated,  nor  its  capriciousness  gauged.  Foolish 
legislation  may  often  hasten  its  departure,  or  retard  its 
beneficent  advent.  But  with  wisdom  the  financial  house 
may  be  put  in  order,  whether  the  preparation  prove  the 
prelude  to  prosperity  or  the  signal  of  the  storm. 


CHAPTER   III. 
BUDGETARY   LEGISLATION. 

The  Budget. — Any  description  of  a  system  of  finance 
must  stand  incomplete,  suspended  as  it  were  in  the  air, 
unless  that  description  shows  how  finance  is  related  to 
the  political  organism  of  which  finance  is  after  all  but 
an  ofifshoot.  It  is  not  enough  merely  to  articulate  the 
methods  of  raising  and  expending  revenue,  and  to 
explain  the  effects  of  such  administrative  activity.  We 
must  venture  into  the  theatre  of  legislation,  where  at 
present  the  financial  drama  begins,  if  we  are  to  under- 
stand the  often  stereotyped  roles  which  the  Treasury 
officials  are  compelled  to  play. 

This  province  of  financial  legislation  lies  at  the  border- 
land of  several  contiguous  fields  of  political  science. 
Constitutional  history,  especially  in  modern  times, 
handles  no  more  important  theme  than  the  gradual 
growth  of  popular  control  over  tlic  public  purse.  The 
study  of  political  activity  in  modern  democracies  cen- 
tres largely  in  the  array  of  opposing  parties  in  matters 
of  taxation.  The  science  of  administration  touches  no 
problem  comparable  to  that  of  the  economic  regulation 
of  the  public  household ;  and  nowhere  can  comparative 
legislation  be  so  advantageously  studied  as  in  the  re- 
spective arrangements  observed  by  modern  senates  in 
disposing  of  the  budget,  the  most  important  item  upon 
their  legislative  dockets.     In  this  '  welter  of  competing 

344 


THE  BUDGET.  345 

juiisdictions  '  the  jurist,  the  historian,  the  administrator, 
and  the  student  of  poHtics  are  almost  equally  interested. 

Financial  legislation,  if  the  scope  of  the  term  be  not 
limited,  sugg^ests  too  broad  a  field  of  inquiry  even  for 
professedly  financial  treatises.  In  one  sense  of  the  term 
any  law  which  entails  governmental  expenditure,  as  well 
as  any  measure  which  affects  banking,  the  currency. 
the  public  debt,  tax-administration,  or  any  of  a  hundred 
other  similar  projects  is  a  financial  measure.  But 
financial  legislation  par  c.xxcUcnce,  to  wit,  the  yearly  sup- 
plies accorded  to  the  public  service,  or  what  is  com- 
monly dubbed  budgetary  legislation,  is  what  most  con- 
cerns us  at  this  stage  of  our  inquiry. 

About  the  middle  of  the  eighteenth  century,  when  th^ 
Chancellor  of  the  Exchequer  rose  to  make  his  great  annual 
financial  speech  in  Parliament,  he  drew  from  his  bongettc, 
or  bag,  the  various  accounts  which  he  laid  before  the 
assembly.  From  that  time  his  speech  was  called,  per- 
haps by  way  of  nickname  and  in  apprehension  of  the 
tiresome  contents  of  the  bag,  the  budget,  and  since 
1760  the  term  has  been  in  general  use.  In  England  it 
still  means  the  Chancellor's  statement  of  the  nation's 
finances.  On  the  Continent,  however,  the  term  budget 
has  broadened  into  a  wider  meaning,  and  refers  rather 
to  the  forecast  of  the  government's  next  annual  income 
and  outlay,  as  well  as  to  the  legislative  authorization  of 
both.i  Broadly  speaking,  budgetary  legislation  em- 
braces the  annual  legislative  appropriations  as  well  as 
the  statutory  provisions  for  raising  public  revenue, 
whether  such  provisions  be  permanent  or  annual. 

To  trace  the  historical  emergence  of  the  budget  in 

*Stourm,  Le  Budget,  p.  4,  defines  the  term  thus:  "  Le  budget 
de  I'etat  est  un  acte  contenant  I'approbation  prealable  des  re- 
cettes  et  des  depenses  publiques." 


346  BUDGETARY  LEGISLATION. 

various  lands  would  take  us  too  far  out  of  the  channel 

of  our  present  (juest.^  lUit  in  ,e^cneral,  the  tale  is  largely 
the  story  of  the  triumph  of  constitutional  government; 
and  as  that  goal  has  been  successively  neared  by  various 
peoples,  certain  financial  usages  have  been  established, 
common  to  them  all.  Such  are  the  popular  control  over 
taxation  through  representative  legislatures,  the  '  ear- 
marking '  of  the  sums  accorded  to  the  government, 
specifying  the  particular  purpose  for  which  alone  these 
sums  may  be  lawfully  expended,  the  audit  of  the  govern- 
ment's accounts  so  as  to  eliminate  fraud  or  illegality  in 
expenditure,  and  an  increasing  degree  of  publicity  in  the 
public  book-keeping.  It  goes  without  saying  that  this 
progress  has  been  more  rapid  in  some  countries  than 
in  others.  Since  1688  budgetary  constitutionalism  may 
be  regarded  as  matured  in  England.  The  American 
colonists  carried  with  them  to  the  New  World  this  part 
of  the  British  constitution.  They  vindicated  it  against 
aggression  in  the  Revolutionary  War,  and  embedded  it 
in  their  fundamental  law.- 

France  was  the  next  nation  to  establish  the  modern 
budgetary  system.  Richelieu  had  typified  the  financial 
regime  of  absolutism  in  his  mot  that  the  public  finances 
should  be  kept  from  profane  eyes,  as  finances  were  the 
nerves  of  the  state.  To  publish  them  were  an  indecent  ex- 

'  See  p.  23. 

"Article  I,  Section  VII,  i.  All  hills  for  raising:  revenue 
shall  originate  in  the  House  of  Representatives;  but  the  Senate 
may  propose  or  concur  with  amendments,  as  on  other  bills. 

Sec.  VIII,  I.  The  Congress  shall  have  power  to  lay  and  col- 
lect taxes,  duties,  imposts,  and  excises,  to  pay  the  debts  and 
provide  for  the  common  defence  and  general  welfare  of  the 
United  States. 

Sec.  IX,  7.  No  money  shall  be  drawn  from  the  Treasury 
but  in  consequence  of  appropriations  made  by  law;  and  a 
•regular  statement  and  account  of  the  receipts  and  expendi- 
tures of  all  public  money  shall  be  published  from  time  to  time. 
— U.  S.  Constitution. 


THE  FEDERAL   BUDGET  IN   THE   UNITED  STATES.   347 

posure.  In  accordance  with  this  idea  the  parUament  of  the 
realm  was  summoned  so  infrequently  that  their  right  ti> 
grant  taxes  to  the  crown  was  almost  forgotten.  The  last  of 
the  "  reunions  intcrmittcntcs,"  as  Stourm  ^  calls  them,  ot 
the  Estates  General  had  taken  place  one  hundred  and  sev- 
enty-five years  before,  when  in  1789  parliament  was  again 
summoned,  and  instituted  the  Revolution.  Out  of  that  con- 
vulsion the  new  financial  order  arose,  and  though  dormant 
during  the  sway  of  Napoleon,  revived  under  tl:e  succes- 
sive governments  that  have  since  existed  in  France. 
The  ferment  of  the  French  upheaval  penetrated  central 
Europe,  and  gave  rise  to  the  revolutionary  struggles  of 
the  middle  of  this  century,  and  though  Bismarck  ~  from 
1862  to  1866  dared  to  set  at  naught  constitutional  gov- 
ernment in  Prussia,  the  nominal  adherence  to  that 
regime  and  its  proximate  realization  since  1848  have 
prevailed  everywhere  in  Europe  outside  of  Russia  and 
Turkey.  We  are  concerned,  however,  not  with  the  his- 
toric process,  but  rather  with  the  extant  forms  of  budget- 
ary legislation  under  advanced  democracies,  and  may 
begin  with  the  description  of  our  own  system. 

The  Federal  Budget  in  the  United  States. — ^Almost 
all  comparisons  of  our  political  institutions  with  their 
analogues  abroad  require  some  reference  to  our  peculiar 
allocation  of  powers  to  the  federal  government  and  to 
the  commonwealths  respectively.  Our  independent 
state  governments,  sovereign  within  the  bounds  pre- 
scribed by  the  federal  Constitution,  give  rise  to  a  double 
financial  network  as  well  as  to  a  double  legal  network 
covering  the  same  territory.  Our  commonwealths  are 
at  liberty  to  raise  what  money  they  will  and  to  spend  it 

^  Le  Budget,  p.  25. 

*  Bismarck  raised  taxes  for  military  purposes  in  defiance  of 
the  Landtag,  but,  after  his  victory  over  Austria,  secured  legis- 
lative amnesty. 


348  BUDGETARY  LEGISLATION. 

practically  as  they  choose,  without  let  or  hindrance  from 
Washington.  Their  revenue  and  expenditure  hang  in 
no  way  upon  the  federal  authorities.  Each  common- 
wealth, with  the  local  units  of  government  it  founds 
and  fosters,  has  its  own  budget.  A  fundamental  sever- 
ance of  our  federal  budget  and  our  state  budgets  is  thus 
decreed.  In  Great  Britain  the  relation  between  the  cen- 
tral and  local  governments  is,  in  legal  theory,  the  very 
reverse  of  ours.  The  local  governments  in  England 
depend  for  their  very  being  on  Parliament.  Practically, 
as  we  know,  a  vigorous  system  of  local  self-government, 
unhampered  save  when  obvious  abuse  of  power  is  at- 
tempted, exists  in  England,  but  local  expenditure  and 
taxation  are  warranted  annually  by  parliamentary  act, 
and  the  divorce  between  the  imperial  and  local  budgets 
is  by  no  means  absolute  as  with  us.  While,  therefore, 
local  revenues  and  taxation  in  England  are  tacked  to 
the  imperial  budget  in  its  final  form,  the  coalescence  of 
the  two  is  rather  forced  than  organic,  and.  we  might 
almost  say,  serves  no  particular  end  except  that  of  statis- 
tical completeness.  Our  American  budgetary  system 
must  be  studied,  therefore,  first  in  the  budget  of  the 
central  government,  and  afterwards  in  those  of  the  com- 
monwealths and  the  local  units  of  government. 

First  in  order  comes  the  federal  budget.  The  start- 
ing-point in  the  description  of  our  federal  budgetary 
legislation  must  be  made  in  scrutinizing  the  annual  esti- 
mates of  probable  expenditure  for  the  coming  year. 
Congress  upon  assembling  early  each  year  in  December 
receives  from  the  Secretary  of  the  Treasury  an  estimate 
of  appropriations  required  for  the  fiscal  year  which  is  to 
begin  on  the  first  day  of  July  next  following.  This 
rather  formidable  collection  of  figures  is  entitled  a  "  Let- 
ter from  the  Secretary  of  the  Treasury,"  and  is  addressed 


THE  FEDERAL  BUDGET  IN   THE  UNITED  STATES.   349 

to  the  Speaker  of  the  House  of  Representatives.  In 
this  voluminous  document  the  various  departments  of 
the  government  are  taken  up  in  order,  and  the  particu- 
larized objects  of  expenditure  under  each  department 
are  set  forth  in  minutest  detail.  Opposite  each  subject 
of  outlay  are  placed  in  parallel  columns  the  statutes 
which  authorize  expenditure  for  such  purposes,  the 
amounts  estimated  as  necessary  for  such  objects  during 
the  financial  year  next  to  ensue,  and  a  statement  of  the 
amounts  actually  appropriated  thereto  for  the  current 
year.  A  comparison  of  the  last  two  columns  renders 
easy  at  a  glance  any  change,  whether  of  increase  or  de- 
crease, which  the  Secretary  ventures  to  propose.  The 
figures  are  summed  up  under  each  main  head,  and 
the  final  summation  gives  the  total  amount  which,  on 
the  face  of  the  matter,  must  be  spent  to  keep  in  running 
order  the  federal  machine  for  the  next  financial  year.^ 
However,  it  would  be  a  mistake  to  take  the  Estimates 
too  seriously,  or  to  imagine  that  they  embody  the  sum  of 
the  financial  wisdom  of  the  Secretary  of  the  Treasury  even 
in  the  matter  of  needed  expenditure,  or  to  suppose  that, 
even  if  they  did,  they  would  thereby  commend  them- 
selves to  Congress.  In  the  first  place,  it  appears  that 
these  imposing  tables  of  figures  are  prepared  by  the 
various  departments  beginning  their  several  tasks  shortly 
after  July  ist  of  each  year.  The  bureaus  proceed  upon 
the  basis  of  their  current  needs  to  guess  at  their  probable 
needs  for  a  financial  year  not  to  begin  for  twelve 
months  to  come,  and  not  to  end  until  almost  two  calen- 


*  It  often  happens  that,  later  on  in  the  session  of  Congress, 
supplemental  estimates,  called  Deficiency  Estimates,  will  be  sent 
in  by  the  Secretary,  specifying  various  objects  for  which  the 
authorized  appropriations  for  the  current  year  are  not  adequate. 
The  financial  year  of  the  United  States  government,  it  must  be 
borne  in  mind,  runs  from  July  i  to  July  i. 


35°  BUDGETARY  LEGlSUTION. 

dar  years  after  the  time  when  work  on  the  Estimates  is 
first  set  on  foot.  Manifestly,  the  chances  for  error  are 
not  small.  By  October  ist  each  department  must  have 
handed  in  to  the  Treasury  its  lists  of  figures.  There- 
upon the  Secretary  proceeds  to  digest  and  combine  the 
partial  reports,  but  even  here  his  discretion  is  bound  by 
hard  and  fast  rules  of  procedure  laid  down  for  his  ob- 
servance. He  may  not  say  to  the  War  Department, 
"  Your  estimates  for  needed  expenditure  upon  rivers  and 
harbors  are  extreme ;  cut  them  down."  But  embodied 
they  must  be  in  the  Estimates.  Not  only  expenditures 
already  authorized  by  law  must  be  included  in  the  Esti- 
mates, but  certain  probable  expenditures  for  public  works 
for  which  the  public  surveys  have  been  legally  provided 
must  be  included.  Equally  wooden  is  the  rule  requiring 
an  arbitrary  sum  to  be  placed  in  the  Estimates  for  re- 
deeming a  part  of  the  principal  of  the  government  debt, 
irrespective  of  whether  there  is  likely  to  be  any  sum 
available  for  the  Sinking  Fund  after  current  expenses 
have  been  met.^  The  extreme  artificiality  of  the  Esti- 
mates is  shown  in  the  Secretary's  annual  Report  on 
the  State  of  the  Finances  rendered  each  December, 
where  with  free  hand  he  sets  forth  the  probable  govern- 
mental income  and  outgo  for  the  coming  financial  year 
without  concerning  himself  about  harmonizing  these 
figures  with  the  totals  of  the  Estimates.  In  this  latter 
report,   which   appears   in   the    public   prints   about   the 

*  Section  3689  of  the  Revised  Statutes  provides  annually  an 
appropriation  "  of  one  per  centum  of  the  entire  debt  of  the 
United  States,  to  be  set  apart  as  a  sinking  fund  for  the  purchase 
or  payment  of  the  public  debt."  but  specifics  tliat  this  appro- 
priation must  come  "  out  of  any  moneys  in  the  Treasury  not 
otherwise  appropriated."  Manifestly  when  current  expenses 
absorb  the  current  Treasury  income,  the  source  of  the  sinking 
fund  appropriation  is  dried  up.  Notwithstanding  the  pros- 
pect of  a  deficit,  the  sinking  fund  appropriation  figures  in 
the  Estimates  year  in  and  year  out. 


THE  FEDERAL  BUDGET  IN   THE   UNITED  STATES.   35- 

same  time  as  the  President's  Message,  the  Secretary  not 
infrequently  takes  occasion  to  discourse  of  financial  re- 
forms and  a  far-reaching  financial  policy.  The  report 
perhaps  gains  the  ear  of  the  public,  while  the  Estimates, 
soon  buried  in  the  committee  rooms  of  Congress,  serve 
as  a  sort  of  actuarial  basis,  of  no  binding  force,  however, 
for  the  first  rough  draft  of  the  various  appropriation  bills. 
Before  following  the  Estimates  to  their  last  resting-- 
place,  the  congressional  committee  rooms,  it  will  be 
needful  to  say  a  word  about  the  committees  themselves." 
The  vast  amount  of  work  devolving  upon  Congress  leJ 
to  the  early  introduction  of  a  committee  system  for  which 
the  colonial  legislatures  offered  models  ready  to  hand. 
The  House  of  Representatives  almost  from  the  begin- 
ning, and  the  Senate  as  early  as  1816,  designated  small 
subdivisions  of  their  members  as  standing  committees, 
charged  with  the  special  investigation  of  particular  ques- 
tions. Upon  these  special  topics  the  committees  drew 
up  various  bills  which  they  reported  in  turn  to  their 
respective  houses  for  discussion  and  eventual  enactment. 
In  its  essence  the  system  of  committees  was  a  labor- 
saving  device.  They  were  designed  originally  only  to 
inform  the  larger  body,  and  suggest  an  intelligent  basis 
of  departure  in  the  matter  of  legislation.  But  in  various 
ways  the  functions  of  the  committees  were  enlarged,  and 
their  early  duty  of  enlightening  the  houses  became 
speedily  the  power  of  dominating  legislation.  Each 
within  its  particular  province,  instead  of  confining  itself 
to  the  modest  role  of  suggestion,  began  more  and  more 
to  assume  the  tyrannical  role  of  dictation.  This  change 
came   about,   owing  mainly   to  the   increasing  pressure 

^  For  the  committee  system  and  the  role  it  plays  in  actual 
legislation  see  Woodrow  Wilson's  Congressional  Government; 
.  Bryce's  American  Commonwealth,  chapters  XV,  XVI,  and 
XVII;    and  McConachie's  Congressional  Committees, 


35*  BUDCETy4RY  LEGISLATION. 

put  upon  Congress  by  our  rapidly  growinj^  population. 
Interests  multiplied  with  such  amazing  rapidity  that  to 
keep  pace  with  them  Congress  was  obliged  to  create  a 
constantly  increasing  number  of  committees,  each 
charged  with  the  oversight  of  a  new  legislative  province. 
The  growth  of  the  two  houses  themselves,  as  additional 
senators  and  representatives  were  admitted  from  the 
newly  erected  states,  cut  down  the  time  that  each  com- 
mittee on  the  average  had  hitherto  been  able  to  com- 
mand of  the  attention  of  the  whole  body.  Thereafter 
Congress  was  forced  to  pass  many  bills  with  little  gen- 
eral debate,  or  to  decline  to  pass  them  at  all.  This  pres- 
sure upon  their  time  was  much  more  severely  felt  by 
the  House  of  Representatives  than  by  the  Senate.  The 
latter  body  was  smaller  numerically,  and  could  await 
bills  for  raising  revenue  which  must  originate  in  the 
House.  The  committees,  therefore,  never  attained  the 
easy  and  almost  undisputed  sway  in  the  Senate  which 
they  exercise  in  the  lower  body.  Whereas  the  House 
cannot  take  the  time  to  elect  the  members  of  its  fifty- 
seven  standing  committees,  but  has  deputed  this  virtual 
power  of  shaping  legislation  to  the  Speaker,  the  slower 
method  of  selecting  committees  by  party  caucus  still 
prevails  in  the  Senate.  The  House,  moreover,  had 
speedily  to  devise  means  for  cutting  ofif  general  discus- 
sion, whereas  the  Senate  still  adheres  to  its  more  leisurely 
system  of  unlimited  general  debate.  In  short,  the  proc- 
ess took  such  a  trend  that  measures  of  secondary  im- 
portance could  frequently  not  obtain  a  careful  ex- 
amination in  the  full  House,  and  therefore,  if  passed  at 
all,  were  likely  to  be  passed  in  the  shape  into  which 
they  had  been  thrown  by  the  committee  reporting  them. 
The  creature  had  become  the  virtual  creator. 

\\  would?  however,  be  a  mistake  to  imagine  that  th^ 


THE  FEDERAL   BUDGET  IN   THE   UNITED  STATES.   353 

various  committees  of  the  House  are  on  a  plane  of 
equality.  Manifestly,  the  eminent  gentlemen  charged 
with  the  matter  of  properly  ventilating  the  capitol  could 
hardly  magnify  their  office,  even  if  so  disposed,  to  a 
parity  with  the  Committee  on  Appropriations.  The 
greater  or  less  importance  of  the  matters  intrusted  to 
the  committees  clearly  distinguishes  the  committees  as  of 
superior  and  inferior  grades.  This  difference  is,  as  it 
were,  an  intrinsic  difference.  But  the  more  powerful 
committees  were  not  slow  in  arrogating  to  themselves 
a  seemingly  artificial  grant  of  power  by  acquiring  a 
preferred  claim  on  the  time  and  attention  of  the  House. 
Certain  privileged  committees  under  the  Rules  of  the 
House  were  allowed  the  right  of  reporting  their  meas- 
ures at  any  time.  The  lesser  committees  could  be 
rudely  pushed  aside,  much  as  a  poor  purchaser  in  a 
shop  might  be  left  to  wait  with  his  bargain  half  com- 
pleted, while  an  obsequious  clerk  rushes  up  to  serve  a 
moneyed  customer.  If  the  House  had  plenty  of  time  at 
its  disposal,  this  right  of  way  possessed  by  the  more  in- 
fluential committees  would  serve  only  to  delay  the  busi- 
ness of  the  minor  committees  so  summarily  displaced. 
But  the  enormous  demands  on  the  very  limited  time  of 
the  House  mean  not  only  vexatious  delay,  but  more 
often  obscurity  and  defeat  for  the  measures  fathered  by 
the  inferior  committees  or  introduced  by  members  in 
their  private  capacity. 

The  privilege  of  reporting  at  any  time,  once  the 
precious  monopoly  of  some  four  or  five  committees,  was 
long  viewed  with  jealous  eyes,  and  was  finally  seized 
and  shared  by  numerous  other  committees.^  Still  the 
committees   so   privileged   are  but   sixteen   in   number. 

*  Section  57  of  Rule  ,  XI  of  the  House  of  Representative.' 
gives  a  list  of  committees  having  leave  to  report  at  any  time- 


354  BUDGETARY  LEGISLATION. 

The  value  of  the  privileg-e  declined  as  the  privilege  be- 
came more  common,  but  upon  the  plane  of  equality  which 
the  more  powerful  committees  had  asserted  for  them- 
selves that  '  dio-nified  oligarch}-  '  called  the  Committee 
on  Rules  has  latterly  erected  its  throne.  With  a  mem- 
bership of  but  five,  and  with  the  Speaker  as  chairman, 
this  dominant  committee  may  map  out,  as  it  will,  the 
time  of  the  House,  and  determine  the  subject-matter  for 
legislative  consideration.  Furthermore,  where  the 
Speaker  associates  with  himself  upon  the  Committee  on 
Rules  the  chairmen  of  the  Appropriations  Committee 
and  the  Committee  on  Ways  and  Means,  he  has  formed 
a  small  but  cfBcient  "  steering  committee  "  whose  large 
power  is  tl:c  signal  feature  of  the  House  as  now  organ- 
ized.i 

It  hardly  needs  to  be  said  that  the  committees  on 
finance  have  always  been  regarded  as  the  most  important 
committees  in  Congress.  Temporary  issues,  such  as 
war,  may  elevate  for  a  time  upon  the  same  high  level 
other  standing  committees,  such  as  those  on  Foreign 
Aflfairs,  but  their  little  day  is  soon  over,  and  while  in  the 
committee  hierarchy  the  Foreign  Affairs,  especially  in 
the  Senate,  stands  high,  its  importance  is  potential  rather 
than  actual.  Treaties  and  conventions  are  of  prime  im- 
portance, but  they  are  not  negotiated  every  year.  But 
no  month  passes  without  the  necessity  for  raising  and 
spending  revenue,  and  the  committees  whose  fingers 
first  fumble  the  public  purse-strings  have  a  substantial 
primacy  among  their  fellows  which  cannot  be  ques- 
tioned. 

The  history  of  the  financial  committees  of  Congress 
is  in  the  main  a  history  of  how  overburdened  commit- 

•  See  Follett,  The  Speaker  of  the  House  of  Representatives, 
pp.  274-280, 


THE  FEDERAL  BUDGET  IN   THE  UNITED  STATES.  355 

tees  have  surrendered,  often  unwillingly,  tasks  of  ever- 
growing complexity.  In  the  House  of  Representatives 
the  Committee  on  Ways  and  Means  from  its  creation  in 
1802  until  March  1865  had  control  not  only  of  measures 
affecting  the  public  debt,  but  of  bills  for  raising  as  well  as 
for  expending  money.  Up  to  1828  appropriation  bills 
were  only  three  in  number  each  session/  and  not  until 
1844  were  the  appropriation  bills  multiplied  beyond 
that  number.  In  1865  the  Committee  on  .Ways  and 
Means,  staggering  under  the  enormous  mass  of  legis- 
lation resulting  from  the  Civil  War,  was  relieved  of 
the  work  of  preparing  and  reporting  appropriation 
bills.  Thereafter  the  work  of  raising  the  government's 
income  was  intrusted  to  one  set  of  men.  and  the  work 
of  spending  that  income  to  another  set.  The  character 
of  the  Ways  and  Means  Committee  since  1865  has 
changed  radically.  Shorn  of  exclusive  control  over  the 
domain  of  finance,  it  no  longer  attempted  to  essay  its 
earlier  role.  During  the  first  four  decades  of  the  Con- 
stitution it  had  reported  thirty-eight  measures  for  rais- 
ing revenue  and  thirty-eight  appropriation  bills.  But 
virtue  had  gone  out  of  it.  It  began  after  1865  to  repel 
changes  in  the  tarifif  system,  and  was  put,  as  it  were,  on 
the  defensive.  In  recent  years  it  has  remained  the  en- 
gine whereby  changes  in  the  federal  tax  system  have 
been  at  intervals  attempted  by  the  two  great  parties.  Its 
preponderating  importance  is  due  perhaps  not  so  much 
to  its  annual  legislative  activity,  as  to  its  being  the  work- 
house in  which  the  great  tarifif  measures  have  been 
forged  which  first  in  the  congressional  arena  and  after- 
wards before  the  people  have  been  fought  out  in  suc- 
cessive political  campaigns. 

'Congressional  Record,  Dec.  15,  1885,  p.  199.     McConachie 
(p.  176,  op.  cit.)  asserts  that  in  1837  the    Rules  enumerated  four 


35^  BUDGETARY  LEGISLATION. 

But  while  revenue  laws  may  be  framed  capable  of  en- 
during for  a  number  of  years,  ai)propriation  laws  must  be 
passed  each  session.  Wliile  the  Ways  and  Means  was 
left  to  enjoy  a  nominal  though  often  an  empty  pre- 
eminence, the  Committee  on  Appropriations  ])ecame 
possesses  1  not  merely  of  the  shadow  of  power,  but  of  its 
substance.  Inheriting  from  its  predecessor  the  pre- 
rogative, then  rare,  of  reporting  at  any  time,  the  Appro- 
priations Committee  at  one  j^criod  ahnost  monopolized 
the  time  of  the  House,  and  controlled  with  a  high  hand 
the  expenditures  of  the  government.  But  its  humiliation 
was  not  long  in  coming.  The  sweets  of  dispensing 
money  from  the  federal  treasury  proved  too  great  a  boon 
for  the  other  committees  f|uietly  to  forego,  and  they 
openly  revolted  against  the  tyranny  of  "  the  white-but- 
ton mandarins  of  the  Appropriations  Committee." 
First  the  power  of  reporting  the  River  and  Harbor  bill 
was  wrested  from  that  committee  in  1879.  Then  the 
Agricultural  Appropriation  bill  was  extorted  from  their 
grasp.  Other  aspiring  committees  demanded  and  ob- 
tained equal  privileges  of  reporting  to  the  House  at  any 
time.  By  1887  eight  different  committees  h.ad  secured 
the  power  to  draft  and  report  appropriation  bills  for  vari- 
ous objects,  and  to-day  onl\-  six  of  the  thirteen  annual 
appropriation  bills  arc  under  the  control  of  the  once 
dominant  Connnittee  on  Appropriations.^ 


general  appropriation  bills;  but  (p.  175)  that  "for  the  first  forty 
years  of  the  nation's  history  appropriations  were  in  the  main 
confined  to  one  regular  annual  law." 

'The  Committee  on  Appro])riations  prepares  bills  for  (i) 
legislative,  executive,  and  judicial  expenses;  (2)  for  sundry 
civil  expenses;  (3)  for  fortifications  and  coast  defences;  (4")  for 
the  District  of  Columbia;  (5)  for  pensions;  (6)  for  all  defi- 
ciencies. See  Rule  XI,  section  3,  Rules  of  the  House  of  Repre- 
sentatives. The  other  appropriation  bills  are  the  Army  and  the 
Military    Academy    bills;     the    appropriations    for    Agriculture; 


THE   FEDERy4L   BUDGET  IN   THE   UNITED  STATES.  357 

The  work  of  the  financial  committees  of  the  House  of 
Representatives  may  be  summed  up  as  follows :  Bills 
for  the  raising  of  revenue  are  drafted  by  the  Committee 
on  Ways  and  Means,  not  annually  as  a  general  rule,  but 
once  every  three  or  four  years,  unless  some  exigency 
like  war  requires  more  frequent  action.  The  spending 
of  money  is  initiated  by  appropriation  bills  drafted  by 
eight  independent  committees  and  passed  annually.  Be- 
sides the  annual  appropriations  there  are  certain  per- 
manent appropriations  made  in  virtue  of  statutes  that 
run  without  date  or  until  they  are  repealed.  The  per- 
manent appropriations  ^  provide  for  the  interest  on  the 
public  debt  and  for  various  other  objects  of  lesser  im- 
portance, including  the  Sinking  Fund.^  In  the  aggre- 
gate the  authorized  permanent  appropriations  amount 
to  about  one  fourth  of  the  total  expenditures.  The  sev- 
eral appropriation  bills  are  reported  to  the  House  in 
committee  of  the  whole.  The  time  for  their  discussion 
is  limited,  not  infrequently  by  a  special  rule  made  pro 
hac  vice.  Amendments  may  be  ofifered,  but  only  such 
as  are  ofifered  by  the  chairman  of  the  committee  report- 
ing stand  much  chance  of  being  accepted.  Other 
amendments  are  swept  ruthlessly  aside,  and  are  gen- 
erally voted  down  after  the  briefest  debate.  At  the  close 
of  the  few  hours  allotted  for  the  discussion  of  the  meas- 
ure the  vote  is  taken ;  and  after  a  perfunctory  ratifica- 
tion by  the  House  of  the  decision  of  the  committee  of 
the  whole  House  on  the  state  of  the  Union,  the  measure 
is  passed  on  to  the  Senate  for  acquiescence,  rejection, 
or  amendment. 

Financial   legislation   in   the    Senate    runs   much   the 

for  the  Diplomatic  and  Consular  service;    for  the  Indians;    for 
the  Navy;    for  the  Post-office;   and  for  Rivers  and  Harbors. 

*  See  sec.  3689  Revised  Statutes. 

*  See  page  350. 


35 8  BUDGETARY  LEGISLATION. 

same  course  as  m  the  House,  except  that  the  smaller 
size  of  the  Senate  allows  a  more  extended  debate,  if 
senators  choose  to  exercise  their  prerogative  of  un- 
limited talk.  The  constitutional  right  of  the  House  to 
originate  bills  for  the  raising  of  revenue  does  not  prevent 
ihe  Senate  from  exercising  an  almost  unlimited  power 
of  amending  financial  measures.  Before  1867  the  Sen- 
ate Committee  on  Finance  had  powers  similar  to  those 
of  the  primitive  Ways  and  Means  of  the  House,  and  con- 
trolled measures  affecting  both  the  raising  and  the  spend- 
ing of  money  except  money  devoted  to  the  Rivers  and 
Harbors  bill,  which  had  become  the  prey  of  the  Commit- 
tee on  Commerce.  In  1867,  however,  the  Senate  Commit- 
tee on  Appropriations  was  created,  and  dispossessed  the 
Committee  on  JMnance  of  its  work  of  considering  appro- 
priation bills.  Even  the  disintegration  of  the  Senate 
Committee  on  Appropriations  is  now  mooted,  but  at 
present  the  three  committees  named  above  have  initia- 
tory control  of  such  financial  measures  as  reach  the 
Senate.  The  Senate  not  only  amends  with  great  free- 
dom such  measures  as  come  up  from  the  House,  but 
commonly  increases  the  amounts  appropriated  to  vari- 
ous objects.  This  necessitates  a  compromise  between 
House  and  Senate.  The  former  generally  votes  to  non- 
concur /;;  toto  with  the  Senate  amendments.  A  commit- 
tee of  conference  is  appointed  consisting  of  an  equal 
number  of  senators  and  representatives.  An  agreement 
is  generally  devised  by  the  conference  committee,  based 
on  no  very  logical  plan  except  the  substitution  of  a 
rough  average  for  the  divergent  amounts  named  in  the 
original  and  in  the  amended  measure.  The  conference 
report  is  quickly  railroaded  through  the  House  as  a  mat- 
ter of  the  highest  privilege  under  the  Rules,  and  is  gen- 
erally accepted  by  the  Senate  as  the  best  it  can  get  under 


THE  IMPERIAL  BUDGET  OF  GREAT  BRITAIN.       359 

the  circumstances.  It  then  runs  the  gauntlet  of  the 
executive  veto,  and  escaping  that,  becomes  the  law  of 
the  land. 

Appropriation  bills,  however  deficient  they  may  be  in 
other  respects,  are  not  lacking  in  this, — that  they  specify 
with  great  minuteness  the  objects  for  which  particular- 
ized amounts  may  be  expended  by  the  departments  of 
the  government.  Alexander  Hamilton  was  probably 
the  only  Secretary  of  the  Treasury  who  ever  received 
free  hand  to  spend  the  moneys  appropriated  by 
Congress,  provided  only  he  did  not  exceed  the  total 
amount  authorized  in  the  single  paragraph  that  consti- 
tuted the  first  congressional  appropriation  law.  Amounts 
appropriated  to  any  purpose  which  in  whole  or  part  re- 
main unexpended  after  two  years  become  no  longer 
available  for  such  purpose,  and  are  covered  into  the 
Treasury's  cash.  The  Treasury  is  provided  with  elab- 
orate auditing  machinery  to  see  that  no  money  leaves 
the  Treasury  except  under  due  sanction  of  law.  The 
same  machinery  examines  the  vouchers  and  receipts  of 
the  various  departments  to  see  that  the  government's 
cash  has  actually  been  received  by  those  who  are  men- 
tioned in  the  departmental  reports.  And  Congress 
finally  has  numerous  committees  charged  "  with  th  ^ 
examination  of  the  accounts  and  expenditures  of  t'  ■ 
several  departments,"  though,  it  is  to  be  feared,  t'.cs' 
committeemen  generally  regard  their  duties  as  little  mor^ 
than  sinecures, — a  view  which  the  mean  status  of  thes3 
committees  probably  reflects. 

The  Imperial  Budget  of  Great  Britain. — Partly  with  a 
view  to  assessing  its  intrinsic  value,  and  partly  to  aflford 
a  basis  of  comparison  with  our  own  financial  system,  an 
account,  though  brief,  of  the  budgetary  legislation  of  the 
British  Parliament  may  here  be  given.     There  as  here, 


3<>0  BUDGETARY  LEGISLATION. 

the  process  may  best  be  approached  by  first  glancing  at 
the  Estimates  of  expenditure.  The  financial  year  in 
England  runs  from  April  ist  to  April  ist.  In  November 
of  each  year  the  various  departments  of  the  govern- 
ment make  up  their  preliminary  estimates  of  ex- 
penditure required  for  the  year  beginning  on  the  first 
of  the  following  April.  These  tables  are  presented  to 
the  Treasury,  whose  head  is  the  Chancellor  of  the  Ex- 
chequer. That  functionary,  if  report  may  be  believed, 
is  allowed  in  digesting  and  combining  the  partial  esti- 
mates a  latitude  which  our  rigid  statutes  do  not  permit 
the  Secretary  of  the  Treasury  to  exercise.  The  Chancellor 
may  question  the  calculations  made  by  the  heads  of  the 
other  departments.  He  may  challenge  the  necessity  of 
the  expenditure  for  which  they  vouch.  He  may  even 
make  a  colleague's  refusal  to  acquiesce  in  the  Treasury's 
pointed  suggestions  the  occasion  of  a  family  row  in  the 
cabinet  until  the  matter  is  adjusted  to  that  select  body's 
satisfaction.  When,  finally,  the  Estimates  are  whipped 
into  such  a  shape  that  they  meet  the  approval  of  the 
Chancellor  and  the  cabinet,  the  figures  are  presented  to 
the  House  of  Commons,  upon  the  collective  responsi- 
bility of  the  cabinet  and  with  its  oflficial  approval.  The 
Estimates  are  submitted  all  at  one  time  in  three  grand 
divisions,  called  respectively  the  army,  the  navy,  and  the 
civil-service  estimates.  Each  grand  division  is  broken 
into  sections,  technically  called  "  votes,"  of  which  there 
are  from  ten  to  twenty  each  in  the  army  and  navy  esti- 
mates, and  about  eighty  in  those  for  the  civil  service. 
No  member  of  Parliament  other  than  a  cabinet  minister 
may  propose  any  "  motion  which  in  any  way  creates  a 
charge  upon  the  public  revenue."  ^     The  matter  is  now 

'Cf.  May,  Parliamentary   Practice  (edition  of  1893),   p.  527 
sq. 


THE  IMPERIAL  BUDGET  OF  GREAT  BRITAIN.       361 

ready  for  legislative  consideration.  For  purposes  of  in- 
formal discussion  the  House  of  Commons  resolves  itself 
into  a  committee  of  the  whole,  and  before  the  whole 
House,  sitting  in  the  capacity  of  Committee  of  Supply, 
the  Estimates  are  presented,  explained,  and  defended  by 
the  Chancellor  of  the  Exchequer.  He  is  subjected  to 
a  running  fire  of  questions  and  criticisms.  The  wisdom 
of  his  proposed  expenditures  may  be  denied  by  the  Op- 
position. They  may  propose  to  cut  them  down,  or  may 
even  refuse  to  grant  them  outright.  But  no  one  but  a 
cabinet  minister  may  propose  their  augmentation,  and  a 
serious  rejection  of  proposed  expenditures  would  pre- 
cipitate the  resignation  of  the  cabinet,  perhaps  the  dis- 
solution of  the  House.  Item  by  item,  the  proposed 
expenditures  are  sanctioned  from  time  to  time  by  the 
Commons  sitting  as  Committee  of  Supply. 

But  these  votes  of  approval  do  not  suffice  to  unlock 
the  doors  of  the  public  chest.  They  are  but  a  prelimi- 
nary assent  to  expenditure  for  various  objects  named  in 
the  Estimates.  To  secure  the  money  wherewith  to  de- 
fray the  expenditures  warranted,  a  second  round  of  par- 
liamentary approval  must  be  secured.  For  this  purpose, 
to  wit,  of  providing  ways  and  means  to  meet  the  ex- 
penditures already  sanctioned,  the  House  resolves  itself 
into  a  Committee  of  Ways  and  Means.  This  in  Parlia- 
ment is  not  a  small  committee  as  with  us,  but  simply 
the  whole  House  sitting  informally  as  a  large  committee 
for  the  business  in  hand.  Step  by  step,  it  is  moved  to 
make  grants  out  of  the  Consolidated  Fund  *  to  provide 
for  the  services  previously  voted  in  the  Committee  of 
Supply.  No  motion  can  be  made  in  the  Committee  of 
Ways  and  Means  to  impose  a  tax  for  the  purpose  of 

*The  Consolidated  Fund  is  a  technical  expression  for  the 
sum  total  of  the  public  revenues. 


362  BUDGET/IRY  LEGISLATION. 

raising  revenue,  "  save  by  a  minister  of  the  Crown,  un- 
less such  tax  be  in  substitution,  by  way  of  equivalent, 
for  taxation  at  that  moment  submitted  to  the  considera- 
tion of  Parhament."  ^  After  some  progress  has  been 
made  in  providing  revenue  to  meet  the  various  expen- 
ditures already  allowed,  the  Chancellor  of  the  Ex- 
chequer, generally  a  few  days  after  the  beginning  of 
April,  makes  his  budget  speech,  ordinarily  in  the  Com- 
mittee of  Ways  and  Means.  In  the  budget  he  reviews 
the  nation's  finances  for  the  year  just  closed,  and  con- 
cludes by  proposing  certain  measures  of  taxation  for  the 
current  year.  Ordinarily  these  embrace  the  proposed 
rate  of  the  income  tax  and  the  duty  on  tea,  as  these  two 
taxes  alone  are  fixed  annually  instead  of  once  for  all. 
As  the  Committee  of  Ways  and  Means  agrees  from  time 
to  time  to  the  various  resolutions  there  presented,  such 
resolutions  are  shaped  in  the  form  of  bills  and  sent  up 
to  the  House  of  Lords  for  their  approval,  which  gen- 
erally follows  as  a  matter  of  course.  These  bills,  there- 
fore, when  the  Crown  has  formally  assented  to  them, 
become  laws  which  authorize  the  government  to  expend 
money  for  its  immediate  needs.  When  finally  all  the 
grants  necessary  for  the  year  have  been  made,  and  the 
Committee  of  Supply  has  ceased  to  sit,  the  various  par- 
tial grants  are  recounted  and  summed  up  in  the  so-called 
Appropriation  Act,  which  provides  for  the  entire  year 
and  is  passed  in  the  Committee  of  Ways  and  Means  gen- 
erally just  before  the  prorogation,  or  temporary  adjourn- 
ment, of  Parliament.  In  short,  the  process  of  financial 
legislation  in  England  consists  first  in  sanctioning 
seriatim  certain  proposed  expenditures  for  certain  defi- 
nite objects.  This  process  takes  place  from  time  to 
time  in  the  Committee  of  Supply.     Then  an  analogous 

'  May,  Parliamentary  Practice,  p.  532  sq. 


THE  IMPERIAL  BUDGET  OF  GREAT  BRITAIN.      Z^Z 

process  of  granting  out  of  the  Consolidated  Fund  cer- 
tain amounts  or  '  credits  '  follows.  These  '  credits  ' 
sanction  expenditure  only  for  the  time  being.  Finally, 
when  the  Estimates  have  been  adopted,  the  various 
temporary  grants  of  money  are  summed  up  and  com- 
pleted by  being  increased  so  as  to  cover  the  expenses 
for  the  entire  year. 

In  England,  as  in  the  United  States,  there  are  certain 
permanent  appropriations  which  are  not  voted  annually 
by  Parliament.  These  permanent  appropriations  are  a 
first  lien  or  charge  upon  the  Consolidated  Fund,  and 
amount  to  about  three  eighths  of  the  total  amount  ex- 
pended annually.  Besides  embracing  the  interest  on  the 
public  debt,  these  standing  appropriations  cover  a  rat/.er 
motley  collection  of  items,  such  as  the  Crown's  salary 
(called  the  civil  list),  as  well  as  the  salaries  of  the  judges 
of  the  realm,  of  the  Speaker  of  the  House  of  Commons, 
"  of  the  porter  of  Holyrood  House,  of  the  perpetual 
curate  of  the  Isle  of  Alderney,  and  of  the  Regius  Pro- 
fessor of  Civil  Law  in  the  University  of  Oxford,"  ^  and 
other  miscellaneous  items.  It  must  be  noticed  that  the 
House  of  Lords  occupies  no  such  position  of  impor- 
tance in  matters  of  finance  as  our  Senate  asserts  for  it- 
self. Whatever  the  precise  constitutional  status  of  the 
Lords  may  be,  as  a  matter  of  fact  they  seldom  refuse  to 
acquiesce  in  the  financial  bills  of  the  Commons,  and 
generally  without  any  substantial  attempt  to  amend  or 
alter  the  terms  of  such  measures. 

The  process  of  audit  and  control  of  expenditures  is 
in  the  first  instance  in  the  hands  of  the  Auditor  and 
Controller-General,  an  official  whose  salary  is  guaran- 
teed out  of  the  permanent  appropriations,  and  whose 
independence  both  of  Parliament  and  the  executive  de- 

*  Anson,  Law  and  Custom  of  the  Constitution,  p.  322. 


364  BUDGETARY  LEGISLATION. 

partments  is  assured.  He  examines  the  statutes  appro- 
priating money,  and  unless  convinced  of  the  legahty  of 
any  proposed  departmental  expenditure  he  may  preven 
the  departments  from  touching  a  penny.  The  govern- 
ment's money  is  on  deposit  in  the  Bank  of  England. 
and  can  be  dravi^n  upon  only  when  the  Auditor-General 
signs  the  orders  upon  the  Bank.  The  same  official  is 
charged  v^^ith  examining  the  vouchers  and  receipts  of 
disbursements,  and  must  report  any  irregularity  he  dis- 
covers to  Parliament.  Money  appropriated  by  Parlia- 
ment must  be  expended  within  the  financial  year  for 
whose  service  the  money  was  voted.  Unexpended  bal- 
ances cannot  thereafter  be  used  for  another  object  even 
in  the  same  executive  department.^  At  the  close  of  the 
financial  year  the  reports  of  both  the  Auditor  and  the 
departments  are  scrutinized  by  a  Public  Accounts  Com- 
mittee of  the  Commons,  who  have  thus  a  final  chance 
to  re-check  and  verify  the  correctness  of  the  govern- 
ment's financial  reports. 

Viewed  from  the  standpoint  of  financial  technique,  the 
English  system  of  financial  procedure  is  admirable. 
The  Estimates  gauge  very  closely  the  actual  expendi- 
tures incurred.  Thus  from  1889  to  1892  the  Estimates 
coincided  within  a  minute  fraction  of  one  per  cent,  with 
the  actual  expenditures.^  They  are  evidently  framed 
with  a  view  to  economy,  as  the  small  deficiency  appro- 
priations prove;  and,  best  of  all.  the  almost  despotic  con- 
trol exercised  by  a  single  committee,  the  cabinet,  secures 

*  An  exception  of  trifling  moment  exists  in  the  War  and 
Admiralty  departments,  where  sums  saved  out  of  temporary 
grants  may  be  applied  in  case  of  necessity  to  other  purposes  in 
the  same  department,  provided  the  total  expenditure  authorized 
be  not  exceeded,  and  a  report  of  the  transfer  be  laid  before 
parliament. 

*Bastable,  Public  Finance,  p.  691,  note. 


AMERICAN  AND  ENGLISH  BUDGETS.  365 

almost   invariably   in   normal   times   an   equilibrium   be- 
tween income  and  outgo. 

Comparison  of  American  and  English  Methods  of 
Budgetary  Legislation.  —  The  brief  outline  which  has 
been  given  will  serve  as  a  basis  for  tlie  comparison  of 
our  methods  of  budgetary  legislation  with  those  in 
vogue  in  England.  Such  a  comparison  must  involve 
much  more  than  a  mere  contrast  of  financial  technique, 
for  the  differences  in  the  two  systems  sprin;j  out  of 
underlying  differences  in  political  structure,  and  a  purely 
didactic  treatment  of  the  subject  issuing  in  a  verdict 
of  the  superiority  of  either  must  be  highly  superficial. 
Fundamentally,  the  characteristic  feature  of  the  English 
financial  system  rests  upon  the  coalescence  of  executive 
and  legislative  powers  in  the  English  cabinet.  The 
unique  features  of  our  system  root  themselves  in  our 
complete  severance  of  the  law-makin:;  and  law-adminis- 
tering powers.  Under  our  Constitution  there  is  no 
guarantee  that  the  President,  the  Senate,  and  the  House 
will  all  be  of  the  same  political  complexion.  As  a 
matter  of  fact  one  of  the  three  is  commonly  at  variance 
politically  with  the  other  two.  Laws  that  meet  the  ap- 
proval of  the  three  must  of  necessity  partake  more  or 
less  of  a  compromise  character.  The  clear-cut  policy 
which  naturally  results  when  the  heads  of  departments 
as  in  England  are  themselves  the  parliamentary  framers 
of  the  laws  they  afterwards  execute  cannot  be  secured 
under  our  system  of  government.  Each  plan  of  govern- 
ment has  its  drawbacks  as  well  as  its  advantages.  But 
it  is  futile  to  suppose  that  either  will  eventually  prevail 
in  both  countries.  The  growing  power  of  the  Speaker 
of  our  House  of  Representatives  has  served  to  give  some 
coherence  to  the  bills  enacted  by  that  body.     It  has  un- 


366  BUDGET/1  RY   LEGISL/lTlOM. 

doubtedly  chained  the  elements  in  the  House  that  made 
for  chaos.  But  that  the  Speaker,  or  a  steering  com- 
mittee of  both  House  and  Senate  will  eventually  de- 
velop into  something  analogous  to  the  English  cabinet 
seems  practically  impossible.  Nor  is  any  very  percep- 
tible progress  making  in  England  toward  our  type  of 
government.  Indeed  many  of  the  comparisons  of  the 
.respective  merits  of  the  two  plans  of  government  are  de- 
fective in  this,  that  they  neglect  the  difference  in  con- 
ditions prevailing  in  the  two  countries.  England  is 
geographically  compact,  and  practically  homogeneous. 
Her  political  habit  is  all  of  one  color.  Her  life,  indus- 
trial and  social,  is  reasonably  stable.  Unity  and  cohe- 
rence of  political  policy  and  action  put  no  severe  strain 
upon  the  English  body  politic.  Our  social  and  political 
life,  on  the  contrary,  is  as  yet  one  of  growth  and  move- 
ment, and  the  question  may  with  reason  be  entertained 
whether  a  frame  of  government  too  loosely  hanging  to 
be  trim  may  not  after  all  be  best  for  us,  as  not  impeding 
the  free  play  of  our  activities,  or  putting  in  duress  ele- 
ments most  safe  when  unconfined.  The  Fathers,  as  we 
fondly  term  them,  were  doubtless  guarding  against  a 
visionary  danger  when  they  devised  our  constitutional 
system  of  '  checks  and  balances  '  to  avert  the  tyranny 
of  any  part  of  the  government.  They  could  not  foresee 
the  growing  force  of  public  opinion  which, of  itself,  would 
be  able  to-day  to  shatter  the  kind  of  tyranny  they  most 
dreaded.  But  in  a  way  they  builded  better  than  they 
knew.  The  safeguards  which  they  devised  against 
usurpation  have  proved  the  bulwarks  of  political  con- 
servatism. The  impossibility  of  sudden  and  far-reach- 
ing changes  which  the  separation  of  powers  effected  has 
redounded  not  a  little  to  our  political  safety.  Were 
sweeping  changes  of  policy  possible  with  us,  national 


AMERICAN  AND  ENGLISH  BUDGETS.  3^7 

unity  and  concord  might  have  been  endangered.  And 
so  in  finance  as  elsewhere,  if  our  system  has  sacrificed 
unity  and  harmony  of  arrangement,  it  has  at  least  con- 
tributed to  make  our  process  of  national  growth,  not 
frictionless,  to  be  sure,  but  reasonably  safe. 

Viewing  the  matter  from  a  closer  and  narrower  stand- 
point, the  technical  excellences  of  the  English  system 
over  ours  become  more  manifest,  but  even  the  legislative 
manipulation  of  finance  reflects  more  than  one  differ- 
ence in  the  phases  of  our  respective  political  systems. 
In  Parliament  the  salient  fact  is  leadership ;  in  Congress, 
equality.  Leadership  of  some  kind  there  must  be  under 
any  system,  of  course.  But  if  in  the  Commons  the  cabi- 
net is  thought  to  be  leadership  made  perfect,  in  our 
House  of  Representatives  the  same  regime  would  be  re- 
jected as  tyranny  unbearable.  The  Speaker  of  our 
House  exercises  the  power  of  a  leader,  not  merely  that  of 
a  moderator.  But  his  power  is  not  the  same  in  kind  as 
that  of  the  cabinet  in  the  Commons.  The  Speaker's 
power  is  after  all  a  power  of  reasonableness — not  always 
of  '  sweet  reasonableness  '  it  may  be,  but  of  reasonable- 
ness after  all.  None  know  better  than  the  eminent  gentle- 
men who  occupy  our  Speaker's  chair  when  they  must 
insist  upon  and  when  they  must  yield  their  individual 
preferences.  It  is  our  Speaker  who  brings  upon  the  pro- 
vincial congressman  the  pressure  of  national  interests. 
Doubtless  these  "  counsels  of  perfection  "  are  often  co- 
gent and  unanswerable  appeals  made  privately  in  the 
interest  of  the  party  which  the  Speaker  and  the  member 
from  Buncombe  serve  both  day  and  night,  but  the  glove 
of  velvet  is  to  be  found  in  the  arrangement  as  well  as 
the  hand  of  steel.  Moreover,  it  may  be  surmised  that 
our  Speaker's  real  power  of  control  chafes  the  less  be- 
cause it  is  not  exercised  in  petty  matters  of  detail.     The 


368  BUDGETARY  LEGISLATION. 

Committee  on  Agriculture  may  be  advised  to  be  *  easy 
on  the  Treasury,'  but  the  Speaker  does  not  '  blue-pencil ' 
the  bill  which  the  committee  frames.  And  while  the 
Speaker's  rewards  and  punishments  consist  in  the  com- 
mittee berths  at  his  disposal,  he  may  not  threaten  recalci- 
trant members,  as  the  English  cabinet  may,  with  the  speedy 
risk  and  expense  of  a  new  election.  On  the  other  hand, 
the  cabinet  stands  to  the  Commons  in  quite  another  at- 
titude. Here  are  the  proposals  for  raising  and  for 
spending  money.  They  must  be  fully  explained  to  the 
House,  at  least  as  fully  as  such  enormous  sums  and  their 
details  can  be  explained  in  the  committee  sittings.  Addi- 
tional expenditures  may  not  be  moved  except  by  a  minis- 
ter of  the  Crown,  nor  proposed  appropriations  increased. 
If  the  supplies  are  refused  or  seriously  cut  down,  the 
cabinet — and  generally  with  uimecessary  verbiage  sa- 
voring a  little  of  hypocrisy — tells  the  Commons  in  effect 
that  another  cabinet  must  be  selected,  or  perhaps  that 
the  bore  of  a  general  election  must  be  endured.  Even 
if  another  cabinet  be  put  in  power,  it  is  but  a  change  of 
masters.  The  new  ministers  will  affect  the  same  horror 
at  having  profane  hands  laid  on  their  sacred  Esti- 
mates. 

Now  it  is  not  to  be  denied  that  the  English  system  of 
cabinet  government  is  most  admirably  contrived  for  se- 
curing consistency  and  unity  in  financial  arrangements. 
Charging  the  same  set  of  men  with  determining  the  ex- 
tent of  expenditure,  and  with  providing  the  necessary 
revenue,  is  admirably  adapted  to  secure  budgetary 
equilibrium.  Income  equals  outgo.  Moreover,  if  Tom, 
Dick,  and  Harry  were  at  liberty  to  saddle  new  items  of 
expenditure  upon  the  government,  this  annual  balancing 
of  accounts  would  be  rendered  impossible.  The  English 
system  may  also  be  credited  with  enforcing  economy. 
Raids  on  the  Exchequer  cannot  well  be  made  when  the 


AMERICAN  AND  ENGLISH  BUDGETS.  369 

"  log-rolling "  ^  system  is  shut  out  by  the  Standing 
Orders  of  the  Commons.  All  this  is  undeniable.  But 
the  point  upon  which  we  are  now  insisting  is  that  the 
machinery  of  legislative  suppression  which  permits  this  in 
England  would  be  summarily  smashed  if  set  up  in  Con- 
gress, and  that,  too,  because  of  the  dominant  notion 
of  equality  which  our  representatives  believe  in  and 
maintain. 

Moreover,  there  are  some  compensating  features  about 
our  system,  extravagant  and  inharmonious  as  it  often  is. 
If  precision  in  securing  equivalence  between  income  and 
outlay  is  sacrificed,  our  system  of  many  committees  does 
allow  a  very  large  number  of  our  legislators  to  be- 
come personally  acquainted  at  first  hand  with  the  real 
needs  of  the  various  governmental  departments.  The 
combined  membership  of  our  appropriation  committees 
makes  up  no  inconsiderable  fraction  of  the  entire  House 
of  Representatives.  Certainly,  more  than  a  quarter  of 
the  whole  House  have  the  opportunity  of  learning  the 
financial  needs  of  the  various  public  services.  And  this 
is  no  small  gain.  Moreover,  it  must  be  admitted  that 
our  congressional  experience  of  intrusting  to  a  single 
committee  the  preparation  of  all  the  appropriation  bills 
Avas  far  from  reassuring.  The  natural  tendency  of  each 
committee  to  be  lavish  in  recommending  expenditure 
for  the  province  which  it  controls  has  been  counteracted 
in  part  by  the  committee's  more  intimate  knowledge  of 
the  real  as  opposed  to  the  fictitious  needs  of  such  subdi- 
visions of  the  federal  service,  and  in  part  by  the  restraint 
exercised  by  the  Speaker  over  all  the  committees.  The 
Appropriations  Committee,  before  it  was  shorn  of  its 
vast  powers,  used  its  prerogative  not  only  to  pass  its 

* "  Log-rolling "  is  an  epithet  applied  to  our  congressional 
practice  where  congressmen  agree  to  support  one  another's 
proposed  appropriation  bills. 


370  BUDGETARY   LEGISLATION. 

own  measures,  but  to  block  any  other  measure — finan- 
cial or  otherwise — of  which  it  disapproved.  Moreover, 
the  hollowness  of  its  plea  that  a  sinp^le  committee  could 
better  oversee  expenditure  as  a  whole  than  could  a  num- 
ber of  committees  was  disclosed  by  the  fact  that  the 
work  of  preparing  the  various  appropriation  bills  was 
turned  over  by  it  to  small  sub-conmiittees  of  its  own 
members. 1  Even  on  the  score  of  economy  the  English 
system  is  perhaps  not  so  complete  a  preventive  of  ex- 
travagance as  is  sometimes  imagined.  The  meaning 
utterances  of  more  than  one  Chancellor  of  the  Ex- 
chequer indicate  that,  notwithstanding  the  cabinet's 
prerogative  of  proposing  new  or  increased  expenditure, 
individual  members  may  bring  such  pressure  to  bear  on 
members  of  the  cabinet  that  the  Chancellor  of  the  Ex- 
chequer is  forced  to  accede  to  such  demands,  and  to 
foist  them  upon  the  ofScial  Estimates. 

Had  our  federal  finances  been  managed  for  the  last 
thirty  years  solely  with  a  view  to  budgetary  equilibrium, 
it  must  be  granted  that  the  successive  series  of  surpluses 
and  deficits  realized  would  prove  its  condemnation.  But 
it  must  be  remembered  that  the  federal  finances  have  had 
to  regard,  whether  wisely  or  not,  the  maintenance  of  our 
system  of  protection.     The  double  task  of  maintaining 

'  "  How  do  they  [i.e.  the  Appropriations  Committee!  audit  the 
accounts  of  this  country  ?  Why,  they  appoint  sub-committees, 
each  of  which  has  charge  of  a  particular  bill.  And  how  many 
of  the  g-entlemen,  outside  the  sub-committees,  have  you  seen 
discussing  this  audit  in  the  face  and  eyes  of  the  House  of  Repre- 
sentatives ?  .  .  .  In  other  words,  these  gentlemen  of  the 
Appropriations  Committee  do  this  very  thing  which  they  think 
the  House  of  Representatives  cannot  be  trusted  to  do:  they 
parcel  out  the  auditing  to  small  committees  of  their  own.  .  .  . 
Hence  I  say  there  is  an  immense  advantage  in  having  this 
House  thoroughly  informed  as  to  the  affairs  of  the  country  by 
increasing  the  number  of  men  who  will  know  something  about 
these  subjects." — T.  B.  Reed,  Cong.  Record,  Dec.  15,  1885,  p. 
199. 


AMERICAN  AND  ENGLISH  BUDGETS.  371 

that  system  inviolate  and,  through  the  same  means,  of 
providing  requisite  revenue  has  stood  in  the  way  of 
securing  equiHbrium.  Moreover,  it  may  prove  that,  what- 
ever our  future  tariff  poHcy  is  to  be,  we  shall  be  chary 
about  frequent  changes  in  the  sources  of  federal  revenue. 
If  this  happens  to  be  the  case,  the  establishment  of  an- 
nual equilibrium  of  income  and  outlay  may  have  to  be 
given  up,  and  plans  devised  for  regularly  meeting  def- 
icits with  temporary  loans,^  and  disposing  of  surpluses 
by  applying  them  to  the  reduction  of  the  national  debt. 
At  all  events  we  may  easily  congratulate  ourselves 
upon  the  superiority  of  our  financial  system  over  the 
French  system.  There  the  Estimates  are  made  as  m 
England  by  the  cabinet  ministers.  They  are  then 
turned  over  to  the  tender  mercies  of  the  Commission  du 
budget.  This  body,  consisting  of  thirty-three  members 
of  the  Chamber  of  Deputies,  does  not  hesitate  to  reshape 
the  Estimates  as  it  will,  generally  by  adding  large  addi- 
tional appropriations.  When  the  appropriations  have 
been  sanctioned  by  both  Senate  and  the  Chamber  of 
Deputies,  they  betray  nothing  less  than  a  hodge-podge 
of  ill-digested  measures  whose  only  predictable  outcome 
is  an  annual  deficit.  Permanent  appropriations  do  not 
exist  in  France,  so  that  even  the  interest  on  the  public 
debt  is  provided  for  only  from  year  to  year  by  legislative 
act.  Credits  accorded  various  departments  do  not  lapse, 
and  the  final  accounts  of  any  financial  year  are  not  ren- 
dered until  several  years  have  passed.  In  striking  con- 
trast to  the  French  method  of  voting  all  appropriations 
annually  is  the  Septennate  in  Germany,  where  military 


'The  Act  of  June  13,  1898,  empowers  the  Treasury  to  emit 
certificates  of  indebtedness,  not  to  exceed  $100,000,000  in  the 
aggregate,  and  maturing  not  later  than  one  year  from  their 
issuance,  in  order  to  meet  a  temporary  deficit. 


372  BUDGETARY  LEGISLATIOhl. 

appropriations  are  voted  for  a  term  of  seven  years  at  a 
time.  If  the  French  plan  is  bad  policy  financially,  the 
German  plan  betrays  an  equally  weak  legislative  control 
over  the  ])ublic  purse. 

State  and  City  Budgets. — Obviously,  no  complete 
outline  of  the  budgetary  legislation  of  American 
commonwealths  and  cities  could  be  attempted  which 
faltered  at  an  infinitude  of  detail.  But  of  the  state 
legislatures  it  may  be  said  in  general  that  they 
shadow  forth,  though  rather  dimly,  the  same  financial 
procedure  as  is  found  in  Congress.^  The  financial 
powers  of  the  state  legislatures  have  been  curbed 
by  repeated  constitutional  amendments,  limiting  the 
duration  of  their  sessions,  the  use  they  may  make  of 
the  state  credit,  and  frequently  the  rates  of  taxation 
they  may  impose.  In  the  states,  the  State  Auditor 
or  the  State  Comptroller,  occasionally  the  Secretary 
of  State,  prepares  what  corresponds  to  the  Estimates 
laid  before  Congress  by  the  Secretary  of  the  Treasury. 
These  Estimates  furnish  the  framework  upon  which  the 
financial  measures  of  the  various  states  are  based  by 
the  several  financial  committees.  Not  uncommonly 
the  system  of  permanent  appropriations  exists  which  de- 
termines, as  it  were,  automatically,  the  fraction  of  the 
total  revenue  which  must  be  assigned  to  each  specific 
object.  It  is  significant,  too,  of  the  growing  financial 
powerlessness  of  the  legislatures,  that  it  is  in  the  older 
states  chiefly  where  this  standing  allocation  of  certain 
fixed  portions  of  the  total  revenue  to  particular  purposes 
prevails.  Though  the  various  departments  may  not  be  able 
to  draw  upon  the  public  money  until  the  yearly  sanction 
of  the  legislature  has  been  accorded,  still  that  sanction  is 

*  See   Annals    of   the   American    Academy   for   i8q6,   art.   by 
E.  L.  Bogart,  Financial  Procedure  in  the  State  Legislatures. 


STATE  AND  CITY  BUDGETS.  373 

only  the  registration  of  the  legitimacy  of  the  public 
spending,  rather  than  a  substantial  exercise  of  an  un- 
hampered legislative  right  to  vote  supply.  Moreover, 
when  the  state  legislatures  do  exercise  their  residual 
power  to  appropriate  money  for  other  purposes,  these 
bills  or  even  their  objectionable  sections  may  be  vetoed 
by  the  governor.  In  American  cities  the  tendency  has 
of  late  prevailed  to  take  away  from  councils  or  boards 
of  aldermen  the  fixation  of  expenditure,  and  to  intrust 
this  power  to  commissions  or  small  bodies  of  adminis- 
trative officials.  Thus  in  New  York  City  (even  be- 
fore the  adoption  of  the  new  charter)  the  Board  of  Esti- 
mate and  Apportionment  exercised  the  real  power  of  de- 
ciding upon  appropriations.^  Evidently  the  whole 
business  of  city  government  in  the  United  States  is  in 
such  a  chaotic  state  of  transition  that  it  is  almost  im- 
possible to  portray  the  typical  budgetary  procedure  of 
the  American  city. 

*  See  E.  D.  Durand,  Finances  of  New  York  City;  Municipal 
Affairs  for  June  1898,  art.  by  A.  W.  Foote,  Uniformity  in 
Municipal  Finance ;  Municipal  Affairs,  Dec.  1900,  art.  by  M.  R. 
Maltbie,  Cost  of  Government  in  City  and  State;  also  art.  by 
Frederick  R.  Clow  in  Publications  of  the  American  Economic 
Association,  1901,  City  Finances  in  the  United  States. 


APPENDIX  A. 

The  war  revenue  act  approved  June  13,  1898,  intro- 
duced the  following  changes  in  our  system  of  federal 
finance : 

(a)  A  duty  of  ten  cents  per  pound  was  imposed  upon 
all  tea  imported  into  the  United  States.  Prior  to  this 
act  tea  had  been  admitted  free  of  duty. 

(6)  The  existing  Internal  Revenue  system  was  altered ; 
first,  by  increasing  the  rates  of  taxation  upon  certain 
articles,  notably  tobacco,  cigars,  and  fermented  spirits ; 
second,  by  charging  the  Internal  Revenue  Department 
with  the  assessment  and  collection  of  a  number  of  en- 
tirely new  taxes.  The  tax  on  manufactured  tobacco  and 
snuff  was  raised  to  twelve  cents  per  pound.  The  tax  on 
cigars  (weighing  over  three  pounds  per  thousand)  was 
raised  from  three  dollars  to  three  dollars  and  sixty  cents 
per  thousand.  Cigarettes  weighing  over  three  pounds 
per  thousand  were  taxed  at  the  higher  rate,  while 
both  cigars  and  cigarettes  of  lesser  weight  were  taxed  at 
a  lower  rate — one  dollar  per  thousand  for  cigars,  and 
one  dollar  and  a  half  per  thousand  for  cigarettes.  Be- 
sides these  taxes  certain  minor  taxes  were  imposed  upon 
dealers  in  tobacco. 

The  tax  on  fermented  spirits — beer,  ale,  porter,  and 
the  like — was  doubled  and  stands  at  two  dollars  per 
barrel  (of  thirty-one  gallons),  though  a  discount  of  7^ 
per  cent,  is  allowed  on  the  purchase  of  the  stamps  used 
to  indicate  the  payment  of  the  tax. 

(c)  The  distinctly  new  taxes  created  by  the  act  may 
be  classed  as  follows : 

375 


376  APPENDIX  A. 

1.  Taxes  on  certain  commercial  transactions  or  the 
papers  and  documents  used  therein. 

2.  Taxes  on  certain  occupations  and  on  specified  kinds 
of  business  enterprises. 

3.  Taxes  upon  legacies  and  distributive  shares  of  per- 
sonal property. 

4.  Taxes  on  miscellaneous  products. 

Under  the  first  division  fall  tlie  taxes  imposed  upon 
the  issue  of  certificates  of  stock  or  bonded  indebtedness 
by  any  company  or  association ;  on  all  sales  of  stocks, 
bonds,  and  other  securities ;  on  bank  checks,  bills  of  ex- 
change, deeds  conveying  realty,  custom-house  entries, 
insurance  policies,  leases,  mortgages,  passage  tickets  by 
foreign-bound  steamers,  as  well  as  on  telegraph  and  tele- 
phone messages,  and  seats  sold  in  parlor-cars  or  sleep- 
ing-cars. 

Under  the  second  division  are  included  the  annual 
taxes  imposed  on  bankers,  l^rokers,  the  proprietor  of  any 
theatre,  bowling-alley,  billiard-hall,  or  circus.  Here  also 
we  must  class  the  taxes  imposed  upon  the  refiners  of 
sugar  and  petroleum.  These  last-mentioned  industries 
are  taxed  not  an  annual  sum  outright,  but  each  a  per- 
centage {\  of  I  per  cent.)  of  its  gross  receipts  in  excess  of 
$250,000. 

In  the  third  sub-division  will  fall  the  tax  imposed  upon 
legacies  and  distributive  shares  of  personal  property. 
Such  taxes  are  in  addition  to  similar  taxes  imposed  by 
the  various  commonwealths.  Where  the  total  value  of  the 
property  passing  by  inheritance  is  under$io,ooo,  or  where 
the  property  (whatever  its  amount)  passes  directly  from 
husband  to  wife,  or  from  wife  to  husband,  no  tax  is  im- 
posed ;  where  the  value  of  the  interest  involved  is  of 
greater  amount  than  $10,000  the  tax  imposed  is  progres- 
sive, rising  according  as  the  inheritor  is  more  distantly 
related  to  the  deceased  owner,  and  rising  also  as  the 


APPENDIX  A.  377 

hereditary  interest  involved  exceeds  the  exempted  mini- 
mum of  $10,000.  The  lowest  rate  of  tax  is  seventy-five 
cents  on  each  $100, — this,  where  the  estate  does  not  ex- 
ceed $25,000  and  the  relationship  between  inheritor  and 
decedent  is  closest.  The  maximum  rate  of  tax  is  $15  on 
each  $100, — this  where  the  property  passing  by  will  or 
under  the  intestate  laws  exceeds  $1,000,000,  and  the  tie 
of  blood  relationship  is  most  distant,  or  where  the  bene- 
ficiary is  a  stranger  in  blood  or  a  body  politic  or  corpora- 
tion. 

Under  the  last  sub-division  must  fall  the  taxes  im- 
posed on  a  variety  of  miscellaneous  articles, — mixed 
flour,  medicinal  and  proprietary  articles,  perfumery  and 
cosmetics,  sparkling  wines  bottled,  and  chewing  gum. 

{d)  The  relative  importance  of  these  various  taxes 
may  be  judged  from  the  following  estimate  made  by 
Mr.  Dingley  of  their  probable  yield  during  the  present 
fiscal  year  (1898-9) : 

Fermented   liquors $58,906,120 

Tobacco  and  snuff 43,840,560 

Cigars  and  cigarettes 17,340,382 

Manufactures  and  dealers  in  tobacco 307,102 

Bankers 2,394,600 

Brokers  (money  and  pawn) 1,500,000 

Brokers   (commercial) 213,094 

Theatres  and  the  like 1,820,447 

Bowlmg-alleys  and  the  like 166,967 

Sales  of  bonds,  stocks,  and  merchandise 10,000,000 

Bank  checks 5,000,000 

Bills  of  exchange  (inland) 1,500,000 

Bills  of  exchange  (foreign) •  • 500,000 

Express  and  freight  bills  of  lading 10,000,000 

Life  insurance  policies •  • 1,226.323 

Mortgages   •  • _. . . .  2,041,599 

All  other  articles  in  Schedule  B   (drugs  of  various 

kinds)    18,000,000 

Proprietary  medicines  and  perfumery 15,000,000 

Chewing  gum •  • 1,000,000 

Legacies  and  successions 9.275.475 

Duty  on  tea 10,000,000 

$210,033,069 


378  APPENDIX  A. 

The  net  addition  to  the  receipts  of  the  Treasury  from 
the  Act  of  June  13,  1898,  was  estimated  by  Mr.  Dingley 
at  $148,481,306. 

(r)  The  Act  of  June  13,  1898,  besides  enhancing  or 
creating  the  taxes  aforesaid,  empowered  the  Secretary 
of  the  Treasury  to  borrow  $400,000,000  for  carrying  on 
the  war.  The  bonds  issued  bear  interest  at  3  per  cent, 
and  are  redeemable  at  the  pleasure  of  the  United  States 
ten  years  after  their  issue,  and  are  payable  twenty  years 
after  their  issue.  Besides  issuing  these  bonds  or  such 
part  thereof  as  is  necessary,  the  Secretary  of  the  Treas- 
ury is  empowered  by  this  act  to  borrow  from  time  to 
time  an  amount  not  in  excess  of  $100,000,000,  and  to 
issue  therefor  three  per  cent,  certificates  of  indebtedness 
maturing  not  later  than  one  year  after  the  date  of  their 
issue.  This  provision  confers  upon  the  Treasury  the 
power  to  meet  a  current  deficit  of  moderate  dimensions. 

';(/)  Lastly,  the  law  in  question  provides  for  a  minimum 
monthly  coinage  of  the  seigniorage,  or  gain,  arising  under 
the  purchases  of  silver  made  in  accordance  with  the  Act 
of  July  14,  1890.  The  bullion  so  transformed  into  stan- 
dard silver  dollars  becomes  analogous  to  the  silver  dol- 
lars already  existing.  They  may  be  paid  out  to  any 
creditor  who  will  receive  them  of  the  government,  but 
inasmuch  as  the  number  of  such  coins  in  active  circula- 
tion is  limited  by  the  commercial  uses  for  such  silver 
coins,  it  would  seem  that  the  greater  part  of  such  silver 
when  coined  will  remain  under  present  conditions  in  the 
Treasury  vaults. 


INDEX. 


AIDAMS  H.  C,  on  commercial  con 
stitutionalism,  il  ?  on  the  po- 
litica  aspect  of  state  railroads,  263= 

Adequacy   of  revenue,  92, 

American  Revolution,  financial  as- 
pect of.  23. 

Annuities    303. 

Appropriations,  how  prepared,  357; 
when  permanent,  357;  available 
TO'  two  years,  359.  in  Great  Brit- 
ain 363,  364 ;  see  also  Financial 
Legislation. 

Assessments,  special,  90. 

Audit  by  Congress,  359*  by  the 
Auditor-General. 

BANKS  of  the  United  States   318- 
the  Bank  War,  31 8. 

Banks.  National,  origin  of,  321;  de- 
posits in   324,    io*^eE  of  333. 

Base,  of  taxation,  56. 

Bastable,  C.  F. ,  on  pubic  lands, 
209;  on  public  debts   289. 

BecKct,  Thomas,  suggests  Scutage. 

Belgium,  taxes  in,  4. 

Berlin,  income  of,  54- 

Bimetallism,  339 

Bonds,  in  aid  of  railroads  222;  sale 
01,  331;  deposit  of,  333. 

Borrowing,  public,  in  1812,  133*  see 
Public  Credit. 

Bryce,  James,  on  state  expenditures, 
31,  32;  on  constitutions    167.  | 

Budget,  definition  of,  344;  origin  of;  \ 
345;  in  England,  346;  in  France, 
347>  371.  in  Prus-.ia,  347;  in  the 
United  States,  347;  in  Great  Brit- 
am,  361 5  in  the  commonwealths, 
362. 

Buxton  Sydney-  on  the  English  in- 
come tax,  184. 


CABINET   government,  contrast  to 
congressional,  366,  368,  370. 
Canard,  on  the  diffusion  of  taxation, 

^7-    .      . 

Capitalization,  its  bearing  on  the 
shifting  of  taxes,  78. 

Certificates,  of  deposit,  325;  silver 
certificates,  335. 

Charity,  public  expenditure  upon,  47. 

Charlemagne,  his  Capittilaries ,  16. 

Clay,  Henry,  on  protection,  165. 

Cleveland,  Grover,  tariff  message  of, 
163. 

Colbert,  on  the  distribution  of  taxa- 
tion, 80. 

Collectivism,  its  theory  of  taxation,  6. 

Committee  system,  of  Congress,  see 
Financial  Legislation. 

Congress,  cost  of,  39. 

Congressional  government,  its  na- 
ture, 367,  369. 

Constitutionalism,  its  growth,  23. 

Cooley,  T.  C,  on  taxation,  56;  on 
direct  taxes,  203. 

Customs  duties,  109,  153;  origin  of, 
155;  colonial  customs  duties,  156; 
canons  of,  166,  174;  incidence  of, 
167.  172,  173;  uncertainty  in  rates, 
167 :  specific  and  ad  valorem,  169, 
178;  on  raw  material,  169,  177; 
variation  in  their  yield,  171;  in- 
direct cost  of,  173,  174;  superior- 
iti' ;  a  revenue  tariff,  175;  framing 
a  revenue  tariff,  176;  on  sugar, 
tea  coffee,  177;  future  tariffs, 
180;  pavable  in  gold,  332. 


D 


,iBTS,  public,  see  Public  Debts. 
Deficits    from  public  industrial 
Venturas.    219:    of   revenue,    their 
effect  on  the  gold  reserve,  337. 

379 


38o 


INDEX. 


Diffusion,  of  taxation,  see  Inci- 
dence. 

Distilled  spirits,  yield  of  taxes  on, 
139;  reduction  of  taxes  on,  141; 
increase  of  taxes  on,  142. 

Distribution  of  taxation,  79  S(j. ;  the 
confiscatory  scheme,  80,  81 ;  the 
progressive  scheme,  80  ;  the  pro- 
portional scheme,  80. 

Domesday  book,  19. 

Duties,  see  Customs  Duties. 

ECONOMICS,  relation  to  public 
finance,  6. 

Education,  expenditure  upon,  45, 
46,  51- 

England,  taxes  in,  5;  expenditure 
on  ;ducation,  51 ;  income  tax  in, 
183,  185. 

English  Revolution,  of  1688,  n, 
12. 

Equalization,  boards  of,  1 1 7. 

Equilibrium,  of  income  and  expendi- 
ture, 370. 

Exchequer,  origin  of,  19. 

Excises,  see  Internal  Revenue. 

Expenditure,  calculation  of,  9;  theo- 
ries of,  25,  26;  extension  of,  27, 
28;  Austrian  theory  of,  29,  note ; 
its  increase,  30;  federal  and  local, 
34;  municipal,  37;  analysis  of 
federal,  38;  naval,  40;  state  and 
local,  43,  45  ;  state  and  municipal, 
48;  comparison  of  American  and 
European,  49;  distribution  of,  50; 
upon  defence,  50;  on  pensions, 
51 ;  on  interest  charges,  51 ;  on 
education,  5 1  ,  comparison  of 
federal,  state  and  local,  52. 

FACTORY  system,  8;  its  introduc- 
tion   into   the    United    States, 
161. 
Ferm,  19. 

Field,  Mr.  Justice,  income  tax  opin- 
ion, 206. 
Finance,  definition,  i ;  derivation  of 
the  word,  2,  note;  practical  bear- 
ings, 4;  theoretical  bearings,  5; 
relation  to  Law  and  Economics, 
6;  to  Ethics,  7;   in  feudal  times. 


15;  early  municipal,  i6;  Nor- 
man, 18. 

Financial  constitutionalism,  in  Eng- 
land, 18. 

Financial  legislation,  in  Great  Britain, 
the  estimates,  360,  364;  their  sub- 
divisions, 360;  the  Committee  of 
Supply,  361 ;  the  Committee  of 
Ways  and  Means,  361 ;  in  the 
House  of  Lords,  363. 

Financial  legislation,  in  the  United 
States,  the  estimates,  348,  349, 
350;  sinking  fund  estimates,  350; 
Report  of  the  Secretary  of  the 
Treasury,  350;  financial  commit- 
tees of  Congress,  35 1;  their  in- 
crease in  number,  352;  their 
growth  in  power,  352;  their 
special  privileges,  353 ;  the  Com- 
mittee on  Rules,  354;  the  Ways 
and  Means  Committee,  355 ;  the 
Appropriations  Committee,  356; 
appropriation  bills,  356;  in  the 
Senate,  357,  358. 

Financial  systems,  of  Greece,  12,  13; 
of  Rome,  14,  15. 

Fiske,  John,  on  government,  1 ;  on 
taxes,  55. 

France,  taxes  in,  5 ;  expenditure  on 
education,  51. 

French  Revolution,  24. 

Fuller,  Chief  Justice,  opinion  in  the 
income  tax  case,  204. 

Franchises,  268,  269;  acquisition  of, 
271;  risk  involved  in,  280;  dura- 
tion of,  280. 

GAS  supply,  221,  227;  in  Philadel- 
phia, 277,  279;  price  of,  283. 
George,  Henry,  on  taxation,  80,  81, 

82;  his  proposal,  83,  84. 
Germany,  expenditure  on  education, 

Gladstone,    on   direct   and   indirect 

taxation.  lOl. 
Gold  standard,  its  conditions,  340, 

342;     parity    of   currency    with, 

340. 
Granger  agitation,  see  Railroads. 
Greenbacks,  326,  327,  328;  proposed 

conversion  of,  338. 


IhlDEX, 


381 


HAMILTON,     Alexander,    on     ex- 
cises,  131 ;  Report  on  Manu- 
factures, 158;  on  protection,  165. 
Hanseatic  league,  17. 
von  Helferich,  on  the  distribution  of 

taxation,  90. 
Hill,   Rowland,   on    postal  charges, 

216. 
Hume,  David,  on  taxation,  62. 

INCIDENCE  of  taxation,  63;  con- 
centration theories  of,  64;  dif- 
fusion theories  of,  65,  66,  68; 
definitive  theory  of,  69 ;  on  various 
incomes,  75 ;  on  monopoly  in- 
comes, 77;  on  wages,  77. 

Income,  sources  of  public,  53 ;  con- 
tractual, 54;  net  income  as  source 
of  taxation,  58;  relation  to  pro- 
gressive taxation,  87;  see  Public 
Income. 

Income  taxes,  79;  definition  of  in- 
come, 181,  182;  in  England,  183, 
185;  general  characteristics  of, 
186;  equalizing  effects,  188;  elas- 
ticity .of,  188;  defects  of,  189:  on 
different  classes  of  incomes,  190; 
in  the  United  States,  191 ;  income 
tax  of  1894,  192;  declared  un- 
constitutional, 195;  criticism  of, 
197;  the  decision  of  the  Supreme 
Court,  199,  sq.;  annual  fixation  of 
the  rate  in  Great  Britain,  362. 

Independent  Treasury,  319. 

Interest,  payment  of,  41,  47;  on 
public  debts,  51. 

Internal  improvements,  37- 


J 


ACKSON,    Andrew,    opposes    the 
Bank,  318. 


LAW,  relation  to  public  finance,  6. 
Leroy-Beaulieu,  on  taxation  in 
Europe,  4. 
Liquor,  taxes  on,  136,  143,  sq. 
Liturgies,  13. 
Locke,    John,  on   the    incidence    of 

taxation,  65. 
Luce,    Robert,   on    taxation    in   the 
United  States,  4. 


MADISON,  James,  on  direct  taxes, 
204. 

Magna  Chart  a,  21. 

Maysville-Road  Bill,  235. 

Mill,  J.  S.,  on  direct  and  indirect 
taxes,  99,  107. 

Monopolies,  natural,  265,  267;  ar- 
gument for  public  ownership)  of, 
270;  argument  against  public 
ownership,  271,  272;  political 
aspect  of,  273;  prices  under  both 
systems,  275-278;  cost  of  opera- 
tion, 279;  experimentation  in, 
281 ;  when  to  be  undertaken  by 
governments,  282;  prices  charged 
by,  282,  283. 

Mortgages,  taxation  of,  121,  124. 

Municipal  ownership,  see  Monop- 
olies. 


0 


EJECT,  of  taxation,  56. 

Olney,  Richard,  on  the  income 
tax,  203. 


PALEY,  on  the  distribution  of  tax- 
ation, 87. 
Paris,  public  income  of,  54. 
Pensions,  41,  42,  43,  51. 
Personalty,    116,    118;    escape  from 
taxation,    1 20,    121  ;    value  of,   in 
the    United    States,     122 ;     local 
taxes  on,  125. 
Physiocrats,  their  theory  of  taxation, 

95,  98. 

Post  -  office,  214,  215  ;  postal 
charges,  215  ;  classes  of  mail 
matter,  217  ;  the  postal  deficit, 
217,  218  ;  Adam  Smith  on,  217  ; 
lower  rales,  219. 

Public  credit,  II  ;  restrictions  on, 
48  ;  see  Public  Debts. 

Public  Debts,  repudiation  of,  108 ; 
why  contracted,  286  ;  peculiarities 
of,  288,  289,  290  ;  when  a  burden 
on  taxpayers,  291,  292  ;  low  in- 
terest on,  293  ;  an  alternative  to 
taxes,  293  ;  undue  resort  to,  293, 
294  ;  effects  of,  295  ;  industry  af- 
fected by,  298  ;  political  and 
social  influences  of,  299,  300,  301  ; 
technical  handling  of,  301  ;  classi- 


382 


INDEX. 


fication  of,  302  ;  funded  and  un- 
funded, 302  ;  jierpt-tual,  303  ; 
non-interf  St  bearing,  304  ;  nego- 
tiatii)n  of,  305  ;  interest  offered, 
306  ;  when  sold  at  par,  306  ; 
popular  loans,  308  ;  taxation  of, 
309  ;  conversion  of,  309  ;  refund- 
i'^g  of,  309  ;  extinction  of,  310  ; 
arguments  for,  312,  313  ;  sinking 
funds,  313. 

Public  Income,  sources  of,  207,  209  ; 
quasi-economic,  207  ;  from  oublic 
lands,  211;  from  public  industries, 
212. 

Public  Lands,  207,  209. 

Public  Works,  47. 

Protjression.  a  norm  of  taxation,  80, 
86  sq.,  88. 

Proportion,  a  norm  of  taxation,  80, 
89,  90. 

RAILROADS,  built  by  federal  aid, 
222,  236 ;  their  problems, 
224 ;  early  notions  about,  226 ; 
their  development.  227  ;  tend  to 
consolidate,  22S  ;  monopoly  rates, 
229  ;  rates  based  on  lolls,  230, 
231  ;  rates  based  on  what  the 
traffic  will  bear,  232 ;  freight 
classifications,  232  ;  fixing  of 
rates,  233  ;  in  France,  234  ;  in 
Australia,  234 ;  in  Prussia,  234  ; 
state  regulation  of,  2^5  ;  construc- 
tion by  the  state,  236  ;  corporate 
construction,  236 ;  the  Granger 
agitation,  237 ;  court  decisions 
affecting,  238  ;  commissions,  238  ; 
discrimination  practised,  238, 
243  ;  the  Cullom  Committee  on, 
239 ;  the  Interstate  Commerce 
Commission,  239,  241  ;  long  and 
short  haul  clause,  240  ;  anti-pool- 
ing clause,  241 ;  federal  acquisi- 
tion of,  242 ;  competitive  waste 
by,  245  ;  extortion,  247  ;  com- 
parison of  American  and  conti- 
nental rates,  248  ;  limitation  of 
rates  and  dividends,  250 ;  pool- 
■ngi  253,  256 ;  competitive  dis- 
location of  rates,  254 ;  fluctua- 
tions    in     rates,      255  ;     political 


aspects   of,    258,    259 ;    financial 
aspect  of  state  railroads,  262. 

Real  estate,  valuation  of  for  taxa- 
tion, 116;  where  taxable,  liS; 
value  of,  in  the  United  States,  122  ; 
taxation  of,  124. 

Refunding,  see  Public  Debts. 

Rent,  taxation  of,  81. 

Repudiation  oi  public  debts,  290, 
291. 

Resumption  Act,  328,  331,  341. 

Ricardo,  on  tlie  incidence  of  taxes, 
66. 

Ritchie,  D.C.,  on  the  test  of  pro- 
posed legislation,  27. 

Roscher,  on  the  shifting  of  taxation 
69. 

Qalaries,  public,  39. 

O      Scitttige,  20,  21. 

Seigniorage,  221. 

Seligman,  E.  R.  A.,  on  personal 
property,  127. 

Shaw,  Albert,  on  public  ownership 
of  monopolies,  273. 

Shearman,  T.  G.,  on  the  taxation  of 
personal  property,  122  ;  on  the 
tariff  duty  on  sugar,  174. 

Shemian,  John,  on  income  taxes, 
19S. 

Shifting  of  taxation,  64  ;  under  mo- 
nopoly conditions,  68-72  ;  under 
competitive  conditions,  69  ;  de- 
pendent on  restriction  of  supply 
74- 

Ship  Writs,  22. 

Sidgwick,  II.,  on  land  ownershiii, 
82. 

Sinking  Funds,  350  ;  see  Public 
Debts. 

Single   tax,  theory   of,   79,   81,  82, 

S3.  93.  97. 

Socialism,  theory  of  taxation,  6. 

Smith,  Adam,  on  the  incidence  of 
taxation,  66  ;  on  customs  duties, 
179  ;  on  public  lands,  211  ;  on  the 
post-office,  217;  on  public  high- 
ways, 235  ;      n  jniblic  debts,  289. 

Smith,  Sydney,  on  taxation,  94. 

Speaker,  of  the  House  of  Represen- 
tatives, his  position,  365-370. 


INDEX. 


3^3 


Stephen,  J,  F.,  on  the  tests  of  pro- 
posed legislation,  28. 

Stoppage  at  the  source,  186,  189, 
198. 

Stubbs,  William,  on  feudal  taxation, 

19  ;    on    taxation    in    relation    to 
self-government,  21. 

Subject,  of  taxation,  56. 

Supreme    Court,  decisions   of,  238, 

239. 

'^Pariff,  155,  157.  161  ;  for  rev- 
1  enue,  161,  175  ;  reduction  of, 
163;  contest  over,  164;  the 
Mckinley,  164,  165  ;  the  Wil- 
son, 166  ;  the  Dingley,  166  ; 
future  tarifts,  1 80  ;  see  also  Cus- 
toms Duties. 

Taussig,  F.  W.,  on  revenue  and 
protective  tariffs,  176. 

Taxation,  10  ;  popular  control  over, 

20  ;  extension  of  control  over,  22  ; 
source  of  public  income,  53  ;  sub- 
ject, object,  and  base  of,  56  ;  limits 
of,  57  ;  fallacies  concerning,  59  ; 
incidence  of,  63,69  ;  equitable  dis- 
tribution of,  79  ;  progressive,  80, 
86  ;  proportional,  80,  89,  90  ; 
pohtico-social  theory  of,  86  ;  de- 1 
gressive,  89 ;  practical  efificiency 
of,  92  ;  inequality  of,  under  single 
tax  system,  95  ;  colonial,  1 14  ; 
valuation  of  real  estate  for,  116, 
117  ;  assessment  for,  I18  ;  of  per- 
sonal property,  1 18,  120,  12 1  ;  of 
general  property,  1 19  ;  of  chattels, 
J  28  ;  ciixians_Qf^__LiS- ;  canons  of 
cMStonas  taxation,  166,  sq. ;  of  m- 
comes,  see  Income  Taxes. 

-  axes,  early  English,  lo  ;  early 
municipal,  18  ;  nature  of,  55,  57  ; 
when  paid  out  of  capital,  58  ;  a 
constituent  of  the  expenses  of 
production,  7 1  ;  when  paid  by  the 
consumer,  72  ;  by  the  producer, 
74;  on  rent,  81,  82;  on  spec- 
ulative gains,  85  ;  on  polls,  89  ; 
indirect,  97,  98,  99,   loo  ;  single 


tax  system,  97  ;  direct,  97-100  ; 
constitution  of  a  tax  system,  98, 
108  ;  increase  of  indirect,  102  ; 
cost  of  collecting,  103. ;  effects  on 
industry,  104,  148  ;  distribution 
of,  105  ;  on  luxuriesj  106,  I47  ; 
political  effects  .of^.IQT. ;_  on  gen- 
eral property,  109,  III,  113)  115 ; 

on   corporations,    109,   126,    127  ; 

on   inheritances,    109,    128,    129  ; 

on  land,  113  ;  in  Ohio,  114,  123  ; 

on    distilled    spirits,    132,  sq.;  on 

manufactures,    134  ;    on    tobacco, 
144  ;  effect  of  on  public  morality, 
150  ;  see  also  Income  Taxes. 
Telegraphs,  state  system  in  England, 

264. 
Thiers,  on  the  diffusion  of  taxation, 

66. 
Tobacco,  tax  on,  114;  taxation  of, 

in  different  countries,  I45. 
Treasury,  administration  of,  315, 
316  ;  the  federal,  316,  317  ;  its 
history,  318,  319;  specie  payments 
to  and  by,  320  ;  relation  to  the  na- 
tional banks,  321  ;  officers  of,  321, 
322  ;  fiscal  functions  of,  322,  323  ; 
effect  of  its  disbursements,  323  ; 
banking  functions  of,  324,  325  ; 
issue  of  notes,  327,  329  ;  gold 
reserve  of,  331,  332  ;  redemption 
of  notes  by,  333  ;  demand  liabil- 
ities of,  335,  336  ;  combination  of 
bank  assets  and  fiscal  assets,  337  ; 
interpretation  of  "  coin,"  342. 
Treasury  notes,  329  ;  their  similarity 
to  the  greenbacks,  330. 

WELLS,   D.  A.,  on  the  diffiision 
of  taxation,  66. 
W'agner,  Adolph,  on  railroad  rates, 

251. 
Water,  supply  of,  214,  220,  221,  267, 

277  ;  prices  of,  283. 
War-chests,  285  ;  objections  to,  287. 
\\Tiiskey  Insurrection,  132. 
White,  Mr.  Justice,  opinion  in  the 

income  tax  case. 


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